Yellen’s Political Move to Sway the Election

BY ANDREW GIOVINAZZI

August 19, 2024

Hey OP Crew,

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

Last Week:

“VIX IV just dropped to last Friday’s levels. Real simple there is plenty of movement to come but unless SPX really dumps, IV is dropping quickly. A note the Sigma levels are about the same as last Friday even with the insane spike on Monday. If VIX IV is not going up, it is coming down once a spike hits.

At a 20 VIX expect 5400 again as crazy as it seems. We cannot hold a selloff and for now we cannot kill this bull. I expect the bottom of the range, 18 VIX at least. Traders will not want to hold expensive premium if SPX is just going to manage 2% ranges for the week.”

The only thing I was wrong about was VIX went down too far and SPX up too fast. That of course made all my subscribers in Trading Desk and Weekly Profit Cycles very happy. I will give myself a B only because I underestimated how crazy the bull was and how low VIX would drop. I rode VIX down most of the week and SPX up so trading wise it was an A.

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VP Harris came out with her big economic plan and it sounds like Nixon for the 70s. From the Fintwit scuttle not even CNN likes it. It did not help markets one bit and looks DOA in less than a day. But who knows? I am excited to hear Frank Gregory’s take on it for Cap Gains this week. Housing starts dipped huge and that could be uncertainty into the election. I found over the years through cycles businesses hold back until they see what they are getting and housing starts are very sensitive. VP Harris is more of a contender than Pres Biden so the landscape is moving. Most other economic news vis a vis the consumer was good, so stocks are quickly erasing the NFP data of two weeks ago.

The Carry Bomb has quickly unwound and it appears the historic rally in VIX was accompanied by an even more historic drop. Mark talks about this on the Youtube Channel. The nature of volatility is such that we need the market to keep moving and right now we got 15% up moves all week until 5500 and Friday basically traders erased the selloff and went bargain hunting. I would say some of the AI premium got knocked off but Nvidia Inc (Ticker: NVDA) is back to $120 from below $100 in a week.

SPX daily price action over the last 30 days with 1 day candles

SPX closed at the highs of the week AND dang near made up July! Slice it however you want but once the rate surprise in Japan was out of the market, traders gobbled stocks of all kinds in a hurry. To make new highs we need good news. The biggest result of the last two weeks was that good news is good again and bad news is bad which to me means interest rates are right for the current climate. Refresh yourself on Milton Friedman if you have any questions on inflation and government spending. I expect new highs to be slower, so the upside volatility should subside this week.

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

Sigma Vols got smoked all week but the Nov is staying up. If you don’t think the elections matter, take a look at the Nov Sigma (green line) outlier above. It is unlikely that Nov volatility will drop anytime soon so once it gets into the VIX calc that will change behavior.

SPX realized volatility snap on Aug 16 2024

Realized vol for 10 days is 23.91% so a slight drop from last week. The 30 day realized vol is 19.50 so VIX sub 15% is running below and discounting all recent moves. Traders are aggressively getting ahead of a drop in IV so that usually means the drop in IV will slow now.

SPX realized volatility snap on Aug 16 2024

VIX Volatility Curves

Closing VIX curve, Aug 16 2024

Closing VIX cash and curve, Aug 09 2024

What a difference a week makes and instructive on why it is important to learn the VIX curve to make you a better option trader. The flat curve is a signal for volatile VIX and it drop 5 points from last week. The contango curve is bearish VIX right now with some contango edge but below the OP Fair Value. It is not a bad looking curve considering the dislocation of the last week.

Basic Vol 101 on our Option Pit YouTube channel

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<

VIX started in Zone 3 and now in Zone 2 which discounts all the recent volatility. To mean this is just a normally functioning market, with daily up and down noise. There is a little edge for the downside move in VIX but not much.

VIX 30 day chart with 1 min candles,

SIGMAs for Aug, Sep and Oct

VIX IV and VIX got smoked. I don’t expect a lot from VIX this week. Maybe a 1 point drop but some “hold” until the Jackson Hole grandee speeches from the pulpit. At some point the Fed Chairman has to address the ridiculous government spending which would be a magic to stocks at this point. As Uncle Milton Friedman, says less regulation and government spending leads to growth, which VP Harris did not get that message before her address.

SPX is too close to 5600 not to tickle it once. I don’t expect JPow to talk about cuts because The the markets are functioning well and rates need to stay where they are because, wait for it, insane government spending. SPX earnings were up 10% YOY so while they did not blow the doors off, companies are adjusting just not meeting the crazy AI expectations.

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