SPX & VIX: Silence before the Storm?

1370 Resistance on S&P500 Index

Two weeks ago I posted a chart of S&P500 approaching a major resistance level – the high of 2011. A week ago SPX has already exceeded both the closing (Friday 24 February 2012) and intraday (Monday 27 February 2012) 2011 highs, although not by a wide margin. It has been moving sideways in the 1360-1380 resistance zone – something that of course gives us no clue about a possible future direction of US equities and global risk attitude.

S&P500 Index, 45 minute bars

Volatility and VIX Index

Realized volatility stays very low – SPX 21-day historical volatility has been below 10 for more than a month uninterrupted. So does the VIX (CBOE Volatility Index), which got back to the 17 area at the end of last week.

Implied volatility remains at big premium to realized volatility on SPX. Many people are now talking about a possible bigger correction in equities and a volatility spike, which is reflected in the prices of SPX options and VIX derivatives.

CBOE Volatility Index (VIX), 45 minute bars

VIX Futures Curve

The story on VIX futures curve also remains unchanged, with near-record steep contango on the short end of the curve.

VIX Futures Curve

Silence before the Storm

The market now looks like silence before the strom. Placing directional bets on equity indexes is hard. The fact that so many people are now talking about falling equities makes it actually less likely. Given the current economic reality, it is very unlikely for volatility to remain so low for an extended period of time. However, the obvious long vol trade has already been priced in to a great extent.

And that’s the beauty of markets. In the end, you never know until it happens.

This Week’s Hot Topics and Markets

With US earnings season over, the focus will likely be on macro data (a lot of interesting employment data – especially NFP – towards the end of the week) and also the evergreens: Europe & Greece, with some flavour of oil. It will also be interesting to watch gold and silver after their last Wednesday’s huge fall.