The Stock Market Rally no one saw coming

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Stocks were nonplussed by the FOMC notes yesterday

The stock market rally was a massive surprise.  I know pundits will pop on TV next week and say that they have been long all the whole rally and got in big yesterday when the Fed went back to throwing hanging curve balls to the stock market.  Maybe Powell and DJT are playing golf at Mar a Lago now.  6 month flat interest rate looks by the Fed are catnip to stocks. Conspiracy theories aside, SPX had yet another face ripping rally and the shorts are wondering what truck just ran them over.  The truck was driven by the Fed and tech, MU and AAPL specifically.

The SPX could rally with some volatility for quite a while

Yes VIX was down today.  Yesterday we saw fits and starts of volatility but nothing really took hold.  Stocks dropped quite a bit but VIX did nothing so it was easy to discount the move.  We added more  vol leverage to the Option Pit Vol Newsletter yesterday and added a bit more today.  Today we got the grind higher with a lower VIX just like it is supposed to.  However the .28 VIX drop was pretty light.  The reason being ATM IV actually went up in SPX.  This is eerily reminiscent of Jan 2018 when SPX and NDX went hyperbolic and the only thing anyone could do was buy calls and hold their breath.  If the same action is afoot, there is a trade shape for that.

Rally in SPX leaves SPX IV 28 Days out firm at 11.63

Charts by CBOE Livevol

AAPL and MU jump started a rally on higher volatility

AAPL is going to $200.  Mark has been riding call flies in the Option Pit Live chat room and they are getting up to the strike in a hurry. MU rallied $3.85 on the news that earnings were not awful, maybe showing the bottom of the chip cycle.  AAPL is $40 from highs and MU $30 so there is plenty of lift left.  SOX made a 52 week high today.   These go-go moves tend to keep SPX volatility stable as the upside move gets relatively large.  I prefer not to get in the way.

The Trade

I like bullish index calendars into the steady vol but do expect vol to dissipate over time.  Hedge with junk puts in case since we have the exact same problems, and none of them are solved save the pace of interest rate hikes. Rates holding steady could just be enough.

Disclosure: positons in VIX, SPY, SPX, AAPL, MU

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