MSFT and GOOGL save the market from inflation

BY ANDREW GIOVINAZZI

April 28, 2024

Hey OP Crew,

AG’s alter-ego Vol Man here with my weekly analysis. As usual, I will start with my last forecast…

If some of my Option Volatility Jargon is vexing, our Glossary is here.

Last Week:

“VIX closed in Zone 3 but did not hold new highs. This is a healthy selloff for now but setting up for a market that is more back and forth. IV is skyhigh relative to underlying close to close volatility so making money buying options in SPX will be a lot more difficult. Big index trades I will need to take smaller profits fast and it is a lot more work.

I expect the same for SPX this week with back and forth trading. The easy run up is done for a while with tech getting smoked. A pullback is healthy after a wild 6 month run up and traders took stocks down quickly that had run up. Now I need to see and the market needs to see good tech earnings at the end of Apr and into May. The low realized volatility to me means stocks will keep the same pattern until the earnings picture adds the good news traders need.

The bigger item is the low realized vol and the flatter VIX curve means VIX can get smoked easily on the whiff of a sentiment change. I don’t think it will happen this week. I am holding a lot of VIX puts in Weekly Profit Cycles and it looks like I will need another week at least before they turn green.”

Well guess what, Alphabet Inc (Ticker: GOOGL) and Microsoft Corp (Ticker: MSFT) saved the market from the poor inflation numbers. Most of my WPC VIX puts are green but one strike is not. Meta Inc (Ticker: META) and poor GDP/Inflation news sent stocks tumbling Thursday only to fully grasp the highs of the week by Friday.

My prognostication was pretty darn good. Both SPX and VIX had decent swings this week. SPX finished on the highs with VIX finishing on the lows. Even with $1 Trillion in extra spending per 100 days, 1.5% GDP growth is pretty sad and you don’t hear the phrase Bidenomics much anymore. That does not mean that tech companies cannot thrive. Inflation hurts Main Street small businesses and we are seeing the results in GDP.

SPX daily price action over the last 30 days

SPX is down 2.5% from the highs but sigma vols are down to two week lows. Not near absolute lows yet so while I think SPX has got past the Middle East, interest rates and growth are no bueno. That also equates to less upside moves and lower volatility.

SPX sigma (Vol per term average) levels over the last 30 days.

Sigma Vols dropped a bunch and likely would drop more if the FOMC was not set to drop their latest bombshell on Wednesday at 2pm ET. The condition of the current market is the algos are set to spring on FOMC notes. I might not like it but that is what it is.

The 10-day realized vol is up to 13.31 form last week just as VIX predicted more movement. If SPX can maintain the rally until Apple Inc (Ticker: AAPL) on May 02 I would be surprised. Most of the other earnings reports were just meh.

SPX realized volatility snap on Apr 19 2024

OP VIX Zone Watch

VIX ZONE 1 9-13

VIX ZONE 2 13.01 TO 17.99 we are here

VIX ZONE 3 18-23.99 we were here

VIX ZONE 4 24<

The front end of the curve dropped out of backwardation and into a more normal contango. Future premiums are a little close to VIX cash which suggests VIX could drop up to 1.5 points next week to get back into line.

Closing VIX curve, Apr 26, 2024

The change from backward to contango was palpable and most of the parabolic style risk came off. Traders are quickly looking at the summer volatility patterns of lower IV with an over 3 point drop.

Closing VIX cash and curve, Apr 19, 2024

Basic Vol 101 on our Option Pit YouTube channel.

VIX 30 day chart with 1 min candles

Inflation is going back up as anyone who listened to Milton Friedman would tell you. At least we know what kind of spending over the last 4 years kicks it into high gear. Bond yields are higher and for most part stocks don’t care. Interest rates were higher in the 90’s and we did ok. However, Uncle Sam had 20 Trillion dollars less in debt and to be honest I don’t know what US Gov is spending it on. At some point it will matter but for now rates are going higher and stocks adjust.

We have a flat market until the Fed on Wednesday, AAPL could surprise with sales growth. That good be the 1 – 2 punch traders need to get to 5200. Implied Volatility is looking for 100 points next week SPX and I think it will get it. Unless AAPL is horrible, expect 5200.

Weekly Profit Cycles is opening for a quarterly subscription if you want to learn to trade VIX/SPY exclusively. I am 11 for 12 for Opens in WPC. So getting paid to own SPY puts it in an up market is something anyone can learn to do.

To Your Trading Success,

-AG