Global Macro: Volatility expands and divergence between sectors

Implied volatility is mean revering in some ways. Volatility expands and contracts, so it oscillates between a higher level an a lower range.

I was monitoring various measures of volatility, such as the CBOE Implied Volatility Index as my systems were indicating a potential short term trend change.

Sure enough, at the end of the trading day, VIX expanded 20%.

Over the year to date time frame, VIX has reverted to its mean.

It is likely we’ll see a volatility expansion from here.

The VIX is implied volatility, which is its the expected vol over the next 30 days for the S&P 500 stocks. More specifically, a VIX of 33 implies a 2% range over the next 30 days. That’s less than half what it was in March with the VIX at 80, it implied a 5% range in prices. Still, investors have gotten used to a VIX around 12 or lower in recent years, except for the occasional volatility expansions. Over the past decade, the bull market presented an average VIX of 17.45, which is materially lower than the long term average of 19.36. At a 17 vol, the implied vol is around 1% a month.

The VIX isn’t always right. Implied vol is calculated based on the options prices of the S&P 500 stocks. It’s a forward looking expectation, as opposed to a rear view looking historical actual volatility, such as standard deviation.

The VIX of VIX (VVIX) is a measure of the volatility of the VIX. The CBOE’s VIX measures the short-term volatility of the S&P 500, and the VVIX measures the volatility of the price of the VIX. So, we call it the VIX of VIX, or the vol of vol.

VVIX gained 10% today, too, signaling a vol expansion.

All of this is coming at at time when my systems are showing a declining rate of change over the past month. The initial thrust off the March 23rd low had momentum, but since then the rate of change has been slowing. It’s running out of steam, or velocity.

Don’t fight the Fed

My systems monitor thousands of macroeconomic data and programmed to let me know what has changed.  Macroeconomics is an observation of the entire economy, including the growth rate, money and credit, exchange rates, the total amount of goods and services produced, total income earned, the level of employment of productive resources, and the general behavior of prices.

I know, sounds exhausting. It is, unless you have a computerized quantitate systems to do it with perfection.

Looking at global macroeconomics, the Fed balance sheet is a key right now.

The H.4.1 from the Federal Reserve is a weekly report which presents a balance sheet for each Federal Reserve Bank, a consolidated balance sheet for all 12 Reserve Banks, an associated statement that lists the factors affecting reserve balances of depository institutions, and several other tables presenting information on the assets, liabilities, and commitments of the Federal Reserve Banks.

US Total Assets Held by All Federal Reserve Banks is the total value of assets held by all the the Federal Reserve banks. This can include treasuries, mortgage-backed securities, federal agency debt and and so forth. During the Great Recession, having already lowered the target interest rate to 0%, the Federal Reserve further attempted to stimulate the US economy by buying and holding trillions of dollars worth of US treasuries and mortgage-backed securities, a process known as Quantitative Easing or QE.

US Total Assets Held by All Federal Reserve Banks is at a current level of 6.721 TRILLION, up from 6.656 TRILLION last week and up from 3.890 TRILLION one year ago. This is a change of 72.80% a year ago.

The chart shows the last 15 years. I marked the last recession in grey.

It’s really high.

The Fed seems much more concerned this time as they have rolled out a much larger helicopter to drop over the cash.

I’m seeing a lot of divergence between sectors as a smaller number of stocks The chart is year to date. Only Technology is positive, by 1.86%. Otherwise, it’s a relative notable range of divergence.

The sector divergence is more obvious over the past month. Barely half of the sectors are positive, the rest and down.

This is just a simple illustration of what appears to be some weakness. The rate of change is slowing and I’m guessing it’s been driven by the massive Fed action.

Now, America is opening for business, but some research I’ve been doing shows it may be a bigger problem that I thought.

I’ll share that shortly.

I’ve also got an important piece I’m going to share about my experience trading the last two big bear markets.

It seems inevitable we’ll get to flow through another one and this one may be bigger and badder, we’ll see.

I think skill and experience is going to be an edge and make all the difference as it did in the past, we’ll see.

But, nothing is ever a sure thing. It’s probabilistic, but probably necessarily implies uncertainty.

It’s probably a good time for individual investors who don’t have tight risk management systems to shift to defense to preserve capital, but it’s not a guarantee, and yes, we’ll see.

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Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global TacticalMike Shell and Shell Capital Management, LLC is a registered investment advisor focused on asymmetric risk-reward and absolute return strategies and provides investment advice and portfolio management only to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as advice to buy or sell any security. Securities reflected are not intended to represent any client holdings or any recommendations made by the firm. Any opinions expressed may change as subsequent conditions change.  Do not make any investment decisions based on such information as it is subject to change. Investing involves risk, including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data are deemed reliable but is not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. The views and opinions expressed in ASYMMETRY® Observations are those of the authors and do not necessarily reflect a position of  Shell Capital Management, LLC. The use of this website is subject to its terms and conditions.

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