Thursday equity market route finally lead to a surge in implied volatility that could see the VIX recover some of the gains made last June. Stronger than expected employment data released by the Department of Labor eroded stocks as treasury yields rose to their highest levels since August of 2011. Tic data showed that investors continue to exit fixed income markets, while inflation data showed that consumers where not bidding up prices.
On Thursday traders focused on jobless claims as opposed to the manufacturing Philly Fed number or the inflation recorded by Consumer prices. The large decline in claims is what caught investors’ attention. Initial jobless claims; fell by 15,000 to 320,000 in the week ended Aug. 10, 2013 according to the Labor Department. The claims number is the lowest it has been since the US financial crisis.
Also released on Thursday was US (TIC) data showed 70 billion of sales in long term securities in the US which reflects a large amount of investors exiting the debt market. US headline CPI came in unchanged, compared to a .2% increase that was expected by economists. The core rates showed a .1% increase which was half of expectations.
The large cap S&P 500 index declined nearly 1.5% which set off a rally in the VIX which climbed nearly 13%. The VIX tested resistance near the 200-day moving average, which also coincides with the 50-day moving average. A close above these levels would lead to a test of 18% and then the June highs near 22%. Complacency has engulfed the equity markets over the past 6-weeks, but higher bond yields have led investors to purchase premium to protect their portfolios.
Momentum on the VIX is strong with the MACD (moving average convergence divergence) printing in positive territory with a strong upward trajectory. The MACD generated a buy signal in early August and continues to point to a higher VIX. The RSI (relative strength index) is printing near 57 which is on the upper end of the neutral range.
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