Last week we pointed out the seeming sustainability of the S&P 500 trading above its 50-day moving average line, and before the end of Friday’s session, we had already seen the 200-day moving average of 1274.25 eclipsed.
The SPX closed Friday at 1285.08, and volumes did begin to return to the marketplace toward the middle of last week, both encouraging signs for those who are looking for a continuation of the recent equity strength, especially given the move through resistance areas in between 1273-1280 which did not seem to stand in the bulls’ way one bit.
Coinciding with this equity rally and “risk-on” atmosphere, we had also pointed to put buying in VIX options in recent weeks, and sure enough, as equities have rallied, the VIX has plunged precipitously. Friday’s close of 24.53 in the VIX was the lowest close since early August, and just to put this in perspective, the VIX had traded above 40 on several occasions since the sweeping equity downdraft that began in early August.
This past week we saw a continuation of VIX put buying, specifically the 19 strikes were in play, as market participants seem to be expressing the sentiment that there is some sustainability in this equity rally which will drive the “fear index,” as the VIX is commonly known, even lower going into year’s end.
On the flipside of this scenario, institutional portfolio managers that wisely added to positions or simply “stayed long” during the challenges of early October can use the current VIX environment as an opportunity to pick up relatively cheap portfolio protection in terms of puts just in case this equity rally does peter out. Too often we see managers hedging on the way down, when the markets have already sold off substantially, and implied volatility levels have already jumped, which reflect in the prices of the options, and conversely we do not see aggressive hedging when the markets are on the way up and portfolio hedges via puts are relatively inexpensive. It simply is a result of the old “fear and greed” phenomenon that exists in the markets that most are very familiar with.
In terms of exchange traded fund flows during the trading week it became very clear to us that customers were aggressively moving from “cash” positions and back into broad based equity index products including iShares Russell 2000 (NYSEArca: IWM), SPDR S&P 500 (NYSEArca: SPY) and PowerShares QQQ (NasdaqGM: QQQ).
IWM alone took in well over $3 billion during the week while investors plowed over $1 billion into SPY and nearly $1 billion into QQQ. This type of activity has us in the frame of mind that institutional managers simply “do not want to miss this rally” and thus want exposure to the major index benchmarks.