VIX makes a 1 year high

BY ANDREW GIOVINAZZI

August 4, 2024

Hey OP Crew,

Learn to trade VXX with Mark here.

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

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

Last Week:

“This week is the end of this Vol Cycle. Apple inc (Ticker: AAPL) and Microsoft Corp (Ticker: MSFT) are at the end of the Big Tech cycle so traders will either love them or hate them. AAPL has pulled a rabbit out of the hat now for the last 3 months so it is possible there is one more. I am still in the sharp rally mode with Weekly Profit Cycles positions. Either way because of the declining VIX this week, earnings and any Fed news should be a mid week VIX catalyst followed by lower VIX Friday into the 2nd week of August.”

There sure was a midweek VIX catalyst followed by not a lower VIX into the 2nd week of August. Apple Inc (Ticker: AAPL) did pull a rabbit out of the hat but it was not enough to keep SPX from dropping 5% this week. VIX peaked near 30 before pulling back to close just under Zone 4 which I believe is significant. The VIX was saying “give it to me this weekend but i won’t pay top dollar.” I was 100% wrong on lower VIX post NFP and FOMC so I got my first D of the year. The midweek VIX catalyst is still running into the close on Friday.

For the first time in 2024, traders got spooked on lower rates and a recession caused by the weak jobs numbers. The level of US Gov spending is not going to work going forward and traders are now worried how that will affect stocks. Also, AI riches are not happening yet. Most of the big chip stocks took a big hair cut this week with the Invesco QQQ Trust (Ticker: QQQ) down 10% from the highs. Correction Territory!!!

SPX daily price action over the last 30 days

SPX closed at the lows of the week and gave back all of July. With recession fears, no more rate magic and AI riches a bit into the future, the sharp rallies of 2024 will get less frequent. I think really the QE era is now over and investors will have to get used to a not accommodative Fed. The market is taking lower rates as an L now and a slower economy.

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

Sigma Vols closed at new highs for the year for closing sigmas. The SIGMA IV level looks almost comical relative to how cheap it was just a few weeks ago. When VIX gets this high, IV is going to move and get very violent.

SPX realized volatility snap on Aug 02 2024

Realized vol for 10 days is up to 17.49%. The move traders were looking for finally kept up as we had a few 1%+ trading days and some solid up and down movement. I don’t expect this to end anytime soon. SPX went from a low volatility environment to mid level volatility environment on earnings dissapointment.

VIX Volatility Curves

This is a classic comparison of how the market moves into a different condition. VIX is now backward to all terms so expect 1.5 to 2% moves per day on average with a very unstable VIX. The VIX futures closed near the highs of the day so the Sep cycle implied volatility jumped and stayed high. Remember VIX is pricing Sep IV now so traders are looking for a bumpy August. All Vol Products are decaying upward.

Closing VIX curve, Aug 02 2024

Closing VIX cash and curve, Jul 26 2024

The VIX curve is backward to all terms and totally swallowed the Election volatility. That means traders are now pricing the current VIX higher than what they expected in the election. My take is Bad News is Bad Again so a slowdown could drop the economy into recession. As late as two weeks ago, that was not in the cards.

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 were here

VIX ZONE 3 18-23.99 We are here

VIX ZONE 4 24< We got to here

VIX touched Zone 4 and pulled back just a bit. The larger question is how much the market takes out of Big Tech. Selling hit most stocks this week into the close Friday. Usually a move deep into Zone 4, we got close to a 30 VIX, and back out means the Vol Event is losing some steam and the much bigger moves still have potential.

VIX 30 day chart with 1 min candles

Basically the QQQ is down 10% and SPX is down 5%. Just small pullbacks when I really think about it. For now this is more a haircut in the pretty stocks while others that underperformed have some room to grow. The recession word is the big issue and how bad things get. That right there is a recipe for more volatility. I would guess just a 20 VIX for a low this week with real potential for SPX to give back another 5% or so with QQQ taking a bigger haircut. That selloff will likely be at the beginning of the week while the bad vibes are still out there. VIX should see 30 again before 20. If VIX breaks 20, stock will stabilize.

Weekly Profit Cycles is opening for a quarterly subscription if you want to learn to trade VIX/SPY exclusively. I am 20 wins for last 26 opens in WPC. So getting paid to own SPY puts in an up market is something anyone can learn to do.

To Your Trading Success,

-AG