Low Volatility and Earnings Drive the Market

Stocks are trading in another narrow range amid light volumes and low volatility Thursday. The S&P 500 has navigated a slim four-point range and is flat at 2173 into midday.

Treasury bonds held steady through a round of data on housing, manufacturing, and jobless claims. The yield on the benchmark ten-year is little changed at 1.6%.

Crude oil dropped 85c to $44.90 and gold added $11 to $1330.

On Wall Street, defensive sectors like Utilities (XLU), Telecomm (IYZ), and Healthcare (XLV) are seeing modest gains. Industrials (XLI) and Basic Materials (XLB) experienced relative weakness.

CBOE Volatility Index (VIX) is up .07 to 11.84 and probing 11-month lows. And trading in the options market is lighter than normal. Roughly 3.2 million calls and 2.8 million puts traded across the exchanges through the first two hours. Projected volume for the day is 13.1 million and 20% below the one-month daily average.

SPDR 500 Trust (SPY) Aug 210 puts, Aug 200 puts, and Sep 212 puts are the most active options of the day.

The interest in SPY puts Thursday is a sign, perhaps, that some institutional investors view the recent drop in implied volatility as an opportunity to buy portfolio protection. For instance, VIX, which recently fell below 12 for the first time this year, tracks the expected or implied volatility priced into a strip of S&P 500 Index (SPX) options and the low readings lately indicate that SPX options have become relatively “cheap”.

Indeed, many measures of volatility have dropped to the lows of 2016 and the iPath S&P 500 VIX Short-term ETF is at record lows. The chart below shows the sharp dive in shares since the spike in late June. Keep in mind, this fund holds VIX futures and one reason for the longer-term downtrend is because of the contango in the futures market: i.e. the rolling of contracts from one month to the next results in a drag on performance.

See Tradespoon’s Stock Forecast on the iPath S&P 500 VIX Short-term ETF (VXX)

Tradespoon’s Stock Forecast on the iPath S&P 500 VIX Short-term ETF (VXX)

While the iPath S&P 500 VIX S-T fund is in a longer-term downtrend, when there is a spike in volatility, shares can see large percentage gains. That’s because contango can shift to backwardation in the futures and that fuels substantial gains in an ETF that holds short-term contracts. Notice the big spike on June 24th – 27th.

Suffice it to say, VIX and the volatility ETF will be worth watching in the weeks/months ahead as the equities market moves out of the summer doldrums and into the historically volatility periods spanning from August through October.

In the near future, however, the focus is on earnings with mixed results driving a lot of choppy trading in the equities market. GE, AT&T (T), Visa (V), and Starbuck’s (SBUX) are due to report before the weekend. Apple (AAPL) is among a wide array companies to report early next week. The tech giant repots on 7/26. No economic numbers are due out until Consumer Confidence Tuesday next week.

So, choppy trading is likely to remain the order of the day as profit reports unfold. The S&P 500 has resistance at current levels of 2173 and yesterday’s highs near 2176. Short-term support is likely at 2170, 2165, and 2150.