As trading drew to a close last week, the S&P 500 Index (SPX) ran into some short-term resistance just above the 1,400 level. This technical pattern looks very similar to the situation that developed in early March. After taking a closer look, however, one can see the recent run higher in the SPX doesn’t have nearly the support the previous upside reversal enjoyed.
Throughout February, the SPX was in a very well sustained uptrend with very little volatility impacting it. In contrast, the recent breakout in the index does not have the same foundation that supported last month’s move higher.
Volatility has also picked up, which could serve as catalyst for further downside. According to iVolatility.com, 10-day historical volatility has advanced slightly higher to 14%. This is still fairly low from an overall perspective, but for the first time in almost a month, the historical volatilities have reversed course. This could be seen as a short-term red flag for the market. Most likely, a test of the 50-day moving average (the ascending blue line in the chart below) is in the cards.
The CBOE Volatility Index (CBOE:VIX) saw a very low close of 14.55 at March expiration, and the lack of historical volatility is slowly taking a toll on the implied volatility levels in SPX options. These low levels in the VIX have brought a great deal of interest into the VIX options pit at the CBOE. On Wednesday, March 21, the daily volume was 1.25 million contracts, one of the most active days in the VIX’s history.
But what makes this even more significant is the fact that the SPX traded in a very narrow range that day. It is very unusual for this type of volume to coincide with a quiet day in the market. Stutland Volatility Group believes this is another example of the continued growth in the volatility space as more and more market players see opportunities to lay off risk by using the VIX and volatility-type products.
The other big news in the volatility world came in the ETP (Exchange Traded Product) space. Credit Suisse announced that they would re-start selective creations of their 2x leveraged VelocityShares Exchange Traded Note (NYSE:TVIX). This product became the darling of volatility space in 2012 only to grow to a point that was unsustainable, and forced Credit Suisse to suspend creations. This move took the entire volatility space for a wild ride in February. The lack of creations caused the TVIX to trade way over the ETN’s intrinsic value and left holders unsure of its real value.
The announcement of selective creations being initiated drove the price of the TVIX down 30% last Thursday. What makes this even more alarming is the fact that the VIX futures closed higher for the day. Needless to say, an ETN that was created to replicate twice the leveraged exposure to the S&P 500 VIX Short-Term Futures index is not exactly tracking the way it was intended.
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