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John A. Rubino

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The Boredom Before the Storm (Time to Buy Volatility)

By John A. Rubino      Printer Friendly Version Bookmark and Share
Mar 18 2010 9:48AM

As eventful as the past few months have been (what with Greece, California, Illinois, Iran, the Lehman Brothers revelations, U.S./China trade friction, and record deficits just about everywhere), you’d think the financial markets would be agitated, to put it mildly. Instead, just about everything is range-bound, and the things that aren’t, like U.S. stocks, are trending slowly, reassuringly, higher. This has taken the VIX, the main measure of fear (i.e. volatility) in the options market down to levels last seen before the 2008 crash.

Here’s how today’s Wall Street Journal puts it:

For the Dow, the Quietest 6-Day Streak

The U.S. Federal Reserve announced, as expected, that it would keep its key lending rate at virtually 0.00%.

Across stocks, bonds and commodities, the big swings of just a few weeks ago have evaporated, leaving markets to muddle between small gains and losses for most of March.

To date, there have been two days this month when the Dow Jones Industrial Average swung more than 100 points during the day. Even the Federal Reserve policy meeting on Tuesday couldn’t incite much interest: The Dow did extend its winning streak to six sessions, but rose a modest 43.83 points, closing at 10685.98—adding just 133.46 points or 1.26% during the run.

Compare the calmness with February, which produced triple-digit intraday moves on 14 of 19 trading days, or January, which saw them on 11 of 19. The first four months of last year saw moves of more than 100 points every day.

The VIX index, a gauge of volatility, has dropped 9.3% this month and at 17.7 is a quarter of where it was a year ago. The Merrill Lynch Move index tracking Treasury options volatility last week hit its lowest level since July 2007. And crude-oil volatility is down to 33 from 40 on Feb. 5 and above 90 at the heart of the crisis.

While a calmer market may make for calmer investors, it is bad news for traders for whom big swings spell profit potential. “What you have now is a combination of people not having to do anything and people not knowing what they want to do,” said Mike Shea, managing partner at brokerage firm Direct Access Partners.

The difference between now and February: Fears of a default by Greece have subsided and investors have become more sanguine about the economy. That might be boring—and unprofitable—for some, but it also may be a lull ahead of another move up for stocks, some traders said.

After February’s turmoil, many aggressive sellers are tapped out, said Cleve Rueckert, a technical research analyst at Birinyi Associates.

“We’re more in a place where the market is comfortable with prices,” Mr. Rueckert said. “We’re looking for stocks to coast moderately higher.”

What does this mean? It means money managers are bored and complacent. They’ve been burned by betting on continued volatility of one kind or another, so they’re pulling back and — as they generally do — extrapolating the recent past into the indefinite future.

This in turn means that all hell is about to break loose. Rising stocks and stable gold, oil, and interest rates are an impossible combination in a world with big and growing imbalances. Continued growth fueled by government borrowing and bailouts will send interest rates and gold up. A return to hard times (due to a housing downturn, California default, or failed debt auction?) will send stocks down. Something has to give in a big way. And when something has to happen, it eventually does.

So either today or very soon, the boredom will end and it will be time to go long volatility again.

John Robino
March 17th, 2010



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