The ISM report was not great today. On the brightside, bad news is bad news again. Should stocks be at an all-time high with weak economic numbers? The answer is probably not. The steady exit from the emerging markets is continuing apace with investors leaving at a good clip. As far as I can tell, Argentina and Turkey are suffering real issues, but the rest of the EM world is just kind of moving along. It does not matter when money wants to hit the exit, they just jump.
That plays in the volatility products, of course. The VIX broke 20 for the first time since October and the move is justified given the larger moves we have had lately. For the most part, the rally in VIX was subdued relative to the move until the close. I have a chart of the VXX up below. VXX buys VIX volatility futures to keep a 30 day duration.
Note how VXX has not hit a new high for the year, but the 30 day IV of the product has. That is a big reason VXX is a lousy long term hold. As anyone can see, it does make a nice short term hold for a while but then you have to bail. The big IV means we could see more big moves in VXX in the short term, but we don’t know up or down.
The problem that the market ran into today is the realization that there is no short term fix. No Draghi, no Bernanke, and as of last week a reduction in bond buying which is de facto higher interest rates. The only thing that could stop the flow of dollars out is time, or just maybe a jump in interest rates by a bigger EM country. The era of the QE bounce is closing. Bring on the NFP at the end of the week.
I don’t think the market gives back all of 2013, but the Santa Clause part is gone. Think about Iron Condors (but scale in) in the indexes and the EM’s are getting close to the lows of 2013. I don’t think the VXX will be a short again until the NFP number at the end of the week. RIP Philip Seymour Hoffman