The CBOE Volatility Index was poised for a lower open on Tuesday as the S&P 500 futures jumped about 2% before the bell.
Heading into the New Year’s holiday last week, overall volumes in the marketplace tapered off significantly with little evidence of any year end window dressing, as it appears that most institutional investors simply sat on the sidelines altogether.
The SPX again struggled to push through its 200 day moving average with any conviction, and closed at 1257.60 on Friday, slightly below its 1258.82 200 day level. After rallying two weeks ago, the broad market traded in a very tight range last week, but the VIX actually crept a bit higher, finding some “chart support” according to our market technician David Chojnacki around the 22.50 range after trading with a 20 handle the previous week.
We note that the recent action in the VIX, from the outside looking in, would indicate that implications of any significant near term volatility in the equities markets has nearly vanished, and the VIX itself is now trading below its 200 day moving average, a level that it has traded above since July of 2011. However, with the European debt situation still in limbo, it would be very plausible for institutional portfolio managers to use these relatively low VIX levels in the marketplace to optimize protective hedges in buying puts in either the VIX itself or SPX or SPY even, or of course in individual equities or ETFs in case volatility does rear its head in this market again.
From a fund flows standpoint, we saw some curious creation activity in both bull and bear products in financials, FAZ (Direxion Daily Financial Bear 3X) and FAS (Direxion Daily Financial Bull 3X) late in the week. In total about $200 million entered the two funds collectively, and its difficult to discern exactly what the motive or trading strategy being enacted is in this case.
It is possible that a relative value based/pairs trading type of institutional fund is making a short term trading play on the spread between the two ETFs or potentially using them as part of a larger trade that incorporates financial stocks and/or options.
Also on the creation side we witnessed over $2 billion enter SPY (SPDR S&P 500), and about $1.7 billion flow into QQQ (PowerShares QQQ), which has been a familiar sight in the past few weeks, with money flowing into select large cap names.
Gold, despite bouncing off of recent lows on Friday, still continues to see outflows on rather heavy volumes, as GLD (SPDR Gold Shares) lost about $700 million to redemptions. Our market technician David Chojnacki points out that gold has broken its longer term trendline, not to mention it is now trading below its 200 day moving average, a level it has not breached, or really did not even come close to touching until the recent fallout that began several weeks ago.
Recently, we have seen a persistent trend of institutional ETF and options players looking for long exposure to the U.S. dollar via UUP and call options in UUP (PowerShares DB US Dollar Bullish), and we highlight $200 million leaving FXE (CurrencyShares Euro) this past week, which basically reflects the same sentiment as those looking for long U.S. dollar exposure. [Dollar, Euro Currency ETFs]
FXE put buyers, as well as call buyers in EUO (ProShares UltraShort Euro) have also been present in recent weeks, and the flows have been rather consistent regardless of where spot euro versus the dollar has been from a day to day basis. A number of equity sector based funds also saw redemptions last week as investors seem to be rotating out of select sectors going into 2012.
Going into the first week of 2012, we will be mindful of where the VIX takes us in the early going and will also look for signs of directional ETF/index options flows which may provide some clues on where institutions are positioning themselves for the first quarter of the year, as these players have been largely absent from the markets in the past two weeks due to the holiday slowdown.
CBOE Volatility Index
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