A Test Of The Bernanke Put
By Rohan Clarke, Data Diary
Friday was not your common garden variety selloff. The 24% spike in the VIX, admittedly from recent lows, was not matched by the S&P – where we could have reasonably expected a fall of something closer to 5% (perhaps the day’s $8bn POMO was working its magic?)
Moves of that magnitude in the VIX are relatively rare. Looked at over time it’s notable that apart from the cascade of selling into the 2009 lows, there have been few occasions over the last three years where equities have trailed moves in the VIX by a similar margin. (By way of explanation, the chart compares the actual move in the S&P500 to that implied by the same day’s move in the VIX – based on the above linear regression of the relationship over the period.)
The last time that we saw an unaccompanied VIX spike was into the market pullback in April 2010. Given that the red lights have been dominating the control board over the last month or so, this all got me to wondering whether we are setting up for a test of the Fed financed bid – even before we run out of QE2 fuel-rods.
Certainly, when viewed through the lens of the put/call ratio, there is plenty of similarity between today’s market and that prior to the pullback last year:
It’s interesting then that looking to a breakdown of option volume, that the spike in volatility looks to be a result of heavy buying of both calls and puts – and that this too is analogous to the April period last year:
Without reading too much into these broad brush measures, these seem to be confirming that upside ambitions have been stretched to the edge of the historical envelope leaving equities vulnerable to a near-term pull-back. Still, the preponderence of call buying and the resilience of the index, suggests the market remains cautious of leaping headlong into the reactor. With up to $29bn of Treasuries to be acquired this week, it’ll be interesting to see how the market wades through the creeping uncertainty.
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by Andrew Wilkinson, Senior Market Analyst at Interactive Brokers
Read more at The Pragmatic Capitalist
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