Buzz on the Street: Twitter Leaves the Nest
A look back at the happenings on Wall Street this week, as seen by Minyanville's Buzz & Banter.
Nervous Investors Afraid of Missing Out on Upside
At approximately 11:44 a.m. yesterday, there was some large call buying activity in S&P 500 (INDEXSP:.INX) options. An investor bought 17,800 March $1925, 4300 March $1850, and 8700 Jan $1920, creating $500 million deltas to buy. At 12:20ish, we began to see the gap higher on the S&P 500. Secondly, at approximately 12:50, we saw a fairly big call buyer in the iShares MSCI Emerging Markets (NYSEARCA:EEM), buying 135,000 Mar 47 calls and 35,000 Mar 45 calls, which created 3 million EEMs to buy. This was in conjunction with commentary from the legendary distressed player Oaktree, who has been buying Chinese equities and selling the U.S. on a relative value play.
Our take is that this could be either a stock replacement with options or a $10 billion fund spending 10 basis points of NAV sounds reasonable if you are concerned about weaker prices or melt up on multiple expansion theme. In layman's terms: "Let's essentially take money off the table because we may be concerned about market valuation, but maintain the ability to capture further as retail may be in the process of driving a near term top into year-end..?"
Climarex Energy (NYSE:XEC) was a short trade idea from last night's report. The setup based on several distribution days and what looked like a test failure of the reversal bar from October 21 did not play out as expected.
Climarex gapped up on earnings. However, stabbing back below the prior reversal from October 30 at 111.27 triggered an Oops sell signal on a trading basis.
Now, Climarex Energy has carved out 3 Topping Tails in close proximity for a potentially bigger picture Charlie's Angels sell pattern.
Below, see a daily Climarex chart from June and a 10-min Climarex chart for 2 days.
Click to enlarge
Click to enlarge
The VIX Drip
After that brief spike heading into the debt ceiling the VIX (INDEXCBOE:VIX) is now back near multi-year lows as the market has resumes its steady bullish march to new highs. This level may seem low in absolute terms but keep in mind that the 20 day realized volatility is now down to 9.85 so the current 12.90 reading is actually a decent premium especially in the context that external events, both big and small, from geopolitical to earnings season recede into the background and we can now expect benign environment for the next few weeks.
The term structure, which briefly went into backwardation, is now in a normalized cantango and about as flat as it has been nearly two years. VIX futures are now running about a 6%-11% premium month to month; ie December futures are $14.80 while January is 16.40. And this is the steepest part as traders are pricing in that the next budget deadlines begin rolling in after the new year. This has taken its toll on VIX related exchange trade products (ETPs) such as the iPath S&P Short Term Volatility (VXX) which is now hitting a new all time low. Remember, these future measures must converge towards cash as they approach expiration. Given the natural contango that means they have a downward drift even if volatility remains flat. Highlighting this inexorable lumbering towards zero the VXX will have a 1-4 reverse split effective tomorrow. This will be the third time since its launch in 2009. So the original price on an adjusted basis is now $6,400. As a long term hedge that has not worked out so well.
Which leads to the notion that catching spikes in volatility is often short lived and very hard to time. That may be the reason the Chicago Board of Options Exchange (NASDAQ:CBOE) recently launched the Short-Term Volatility Index (INDEXCBOE:VXST) which a 9-day volatility measure. I'm sure that futures, options and ETPs will follow in coming weeks. This will help traders align short-term hedges with known upcoming events.
Overall, the option measures such as the VIX and put/call ratio, combined with other sentiment readings such as bull/bear reports, are creeping towards complacent levels far from extremes meaning it can persist for longer than expected. For now having a moderate amount of insurance, rather than expecting a huge correction, seems the prudent approach.
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