Some Financials are springing back to life
As the market sits for the 4th month waiting for big things to come out of Europe (this time the day is Friday) there have been some solid trends that give some hope that the end is drawing near. As I normally do with this newsletter I am following broader volatility trends with price movement. The two go together like Starsky and Hutch. Are the moves accompanied by declines or gains in volatility? This helps in determining the quality of the move (and maybe some froth). If the names move higher on increasing volatility, to me that means folks are reaching for the options and going to the market for protection, or just a good old fashion “surprise” on the underlying movement. For the former I use the AlphaVision™ Landscape in total for broad trend and for the latter I look if there is any intra Sector activity. So what do we have this morning?
First, I will start with the IV30 less HV60 Volatility Landscape. This has probably been my most useful view the last 4 month so. Why? Because the market has been moving in lockstep and sell offs and rallies have been accompanied by wide swings in volatility. The IV30 (forward looking day 30 Implied Volatility) less HV60 (backward looking 60 Day Implied Volatility) give a window into how liquidity providers are pricing the near term month against a backdrop of last 2 month’s average movement. You see mostly red in the landscape below (red means the IV30 is less than the HV60). That has been a trend for at least a month. What you notice in the foreground for Health Care are a bunch of Dark Green stocks. These are just Biotechs and trade like this normally (they don’t do much until an FDA announcement, so the options tend to be priced higher). The big difference I have seen is the amount of Dark Red (IV30-HV60 < 10 points) names. That is increasing by a good bunch. Over all the trend of cooling is picking up steam.
Note the zoom in on the Financials below. One reason I like creating these landscapes with a movement component is to judge the quality of the move. As I started clicking around I noticed all the Financial Insurers are having a bit of resurgence from S&P ratings - do they still matter? It sure looks like the market thinks so. Also note that the group pretty much is dominating the IV30 and movement area for the Financials the last week. I think the long term prospects are pretty good for this industry (could it have gotten worse over the last 3 years) mostly as the survivors start to bounce off the bottom (AGO was the big driver but decent follow through from MTG, MBI, RDN) and start to generate money again (some might get a boost also from settlements). Given the nice levels of IV30 you can create some long delta positions just below the market if you missed the first leg of the bounce or fade the euphoria in a controlled way (read spreads) above the market. Either way some things appear to be looking better even if it was the most battered part of the market not so long ago.
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