S&P500 Within 2% From Low, 1292-1340 a Boring Zone

Quieter Week after Losses as S&P500 Holds above Support

After 3 weeks of big losses for long equity investors, last week gave them a little break as S&P500 found support around 1292. There was very low volatility and the week’s range was only 33 points, or 2.5%. Yesterday’s US holiday probably played a role, among other factors.

For the next few days, I will find the market quite boring until we see the SPX either retesting the lows (1292) or regaining a more significant part of the previous losses. On the upside, there could be some potential resistance in the 1340’s, and if we get past that then April lows (1357-1359) will definitely be a level to watch. Until we get to one of those, 1292-1340 is a boring zone for me.

S&P500 Index, daily bars, Oct 2011 - May 2012

VIX Index: Will Summer 2011 Repeat Itself?

On the chart below you can see the VIX (CBOE Volatility Index) during the same time period as the S&P500 chart above. Even after the equity losses and VIX fast increase from 17 to 25 in May, implied volatility is still way below the levels seen in the second half of 2011, although the uncertainty regarding fundamentals didn’t go away.

CBOE Volatility Index, daily bars, Oct 2011 - May 2012

Looking at this and similar charts makes me less eager to think about any short volatility positions, which would otherwise come to mind when looking only at 2012 and at the huge premium of VIX to realized volatility (21-day HV was at 11.31% on Friday).

In fact, when you look at the first half of 2011 (not on the chart), you can see both historical volatility and the VIX at levels not too different from the current ones. You know what followed in summer 2011.

VIX Futures Curve Moved Down, Short End First

VIX curve moved down in the last week, in line with the positive S&P500 performance. Interestingly, the short end of the curve dropped first, followed by the long end in the second half of the week.

VIX futures curve

The crazy situation on the very long end of the curve must be taken with a grain of salt, as liquidity is extremely low on the two most distant futures months (only 1 contract of Feb13 was traded on 22 May, with open interest also 1; on Friday the volume was 20, and OI only 34 – bid-ask spreads of course are wide).