BY ANDREW GIOVINAZZI

August 6, 2023

Each week, I’ll give an overview of a stock and Licia Leslie will follow that up with a chart analysis the next day. Bill Griffo will chime in with macro analysis and Andrew Giovinazzi will then finish out the week with a volatility breakdown.

Have a stock YOU want us to review? Email my team here. – Mark

Hey Traders,

What a pickle! The USA might be in a pickle!

The last time a big ratings agency downgraded the USA, there was a big shift in volatility. The SPDR S&P 500 Trust (Ticker: SPY) went from 130 to 110 or about 15% drop in a couple of weeks. To say it caught the market off guard after a few years of rally after the GFC is an understatement. The reality was Uncle Sam never reduced spending after the GFC, so spending outpaced revenues.

Sound familiar?

SPY chart with IV360 circa 2011 post S&P downgrade.

The big thing to note was the sustained jump in IV through November. The snap above shows IV360 post downgrade – it topped out in the mid-30s. 

Are we set up for that again?

SPY IV was at a 3 year high and a near generational low in 2011. Now it’s only down 13 points or around 3% from the top.

What I noticed in the chart above was the insane volatility that followed the S&P downgrade in 2011. Most of that was the Euro crisis as the Eurozone needed to get its fiscal house in order.  All of these things are are coming back to the for post-COVID

SPY 3 month chart with IV360

IV360 is only 15.75%, but it hasn’t gone down from the shock earlier this week. I also noticed a close at the lows this week which is never a great sign for next week. Things can turn around, but for now, in order to get VIX to really pop we’d need another leg to the trouble like we had in 2011.

So far that has not happened. I did read in some financial news that the last downgrade caused some funds to dump Treasuries, but now the language has changed that they only have to hold high quality government bonds, not top rated. That’s a big change if pension funds and banks don’t have to sell like in 2011.

SPY is for sure not a generational buying opportunity with 10 year high IV right now. I don’t expect it to get that way next week unless another giant shoe drops.

To Your Trading Success,

AG