Is Volatility on a Summer Vacation?

Is the market’s mood just mellow—or is volatility really on vacation? Jeff Praissman and Scott Bauer break down the calm summer trading vibes, what’s fueling the low VIX, and whether traders should be buying protection while it’s cheap.

Summary – IBKR Podcasts Ep. 267

The following is a summary of a live audio recording and may contain errors in spelling or grammar. Although IBKR has edited for clarity no material changes have been made.

Jeff Praissman

Hi everyone. My name’s Jeff Praissman with Interactive Brokers. Welcome back to our Mid-Market Update. Scott Bauer from Prosper Trading—hey Scott, how are you?

Scott Bauer

Jeff, I am great, enjoying the summer. How about you?

Jeff Praissman

It’s nice to finally get the summer going. I can’t believe it’s actually starting—I feel like winter would never end sometimes. But we’re happy to have you here midweek to discuss the previous five days and the upcoming five days.
Without further delay, Scott—another wild week in the market. Kind of overall bullish movement. We’ve had some anticipation leading up to last Friday with potential additions to the S&P 500, and those markets were running up leading into it.
But the news came out Friday night that no new stocks will be added, so there’s a little bit of fallback in those names. I want to ask you—why is it considered a positive to be added to the S&P?

Scott Bauer

Sure. Once a company is actually part of the S&P 500, it puts them in a much different class. You typically see a jump in the share price, but longer term, the reason is really quite simple—because S&P index fund managers who are benchmarking the S&P, they must buy that stock.
Okay? If that’s going to be included in their results, they have to buy that stock. Obviously, that raises interest, helps push the stock price higher.
Last week, with some of the word that was out there, Robinhood (HOOD) was one of the stocks that was highly anticipated to be added in. It ran up into Friday and then sold off when it was not included.
Being in the S&P 500 is not just a badge of honor—which it is, a big honor—but from a fundamental standpoint, these fund managers have to buy that stock.

Jeff Praissman

Got it, got it. So there are some very fundamental and practical reasons why it’s considered a positive. Switching gears a little bit, the Fed’s going to be announcing their next interest rate decision next week on June 18th, if it hasn’t already.
When does the market start reacting to the expected result? In this case, I’m hearing that they’re expecting no change in rates.

Scott Bauer

Correct, and the market is already pricing that in. In fact, I think the CME FedWatch Tool basically is at 100% for no change in rates for the next meeting.
So the question now becomes—especially after some recent inflation data—what about July? What about the September meeting?
Because we’ve seen over the last several weeks the way that rates have gone, we’ve seen some people saying, “Ah, there’s not going to be any cuts this year.” And now, after the recent inflation news, okay, maybe September is back on the table.
So I think for July it’s a very small probability—maybe 15% to 20%—but September is ramping up.
So that is… we’re seeing markets trade like that. We’re seeing the Treasury markets trade like that. And I would say that the market does a pretty good job of handicapping what the Fed may or may not do.

Jeff Praissman

Got it. So it’s baked in each time—what the market’s expecting. And how has volatility reacted over the past week, and what do you expect for the next week coming up?

Scott Bauer

I know it’s summer trade right now, and typically over the summer we do see depressed volatility. But I think in this environment, Jeff, vol is too cheap.
We’re seeing the VIX under 17 now as we speak—it’s 16 and change—and it’s the lowest it’s been in several months now.
Yes, volumes are a little bit lighter now. We do have some of that summer trade, but I really think that vol is too cheap—not just in the VIX, but a lot of individual equities that are still moving pretty sizably on a daily basis.
Take a Tesla, for instance. Even a Microsoft. Some of these stocks—to me, volatility is way too inexpensive.
And this is a time as a trader where you say, “Buy ’em when you can and not when you have to,” meaning: when vol is cheap and maybe it’s on sale, buy that protection.

Jeff Praissman

Got it. Makes sense. And there’s this overall kind of bullish movement we’ve experienced over the last couple weeks, really.
But are there any sec— we just got done with earnings season a little while ago. Are there any sectors in particular pulling the market up, or has it been spread out evenly? Is anything standing out over the others?

Scott Bauer

It is pretty spread out, but you really have to look at the Mag Seven that have really led this comeback in the marketplace.
The NVIDIAs, we’ve got Microsoft trading at all-time highs, Google—even with some of the antitrust stuff going on—has been really strong. So Mag Seven stocks have been really solid.
I like the financials, quite frankly. We’ve seen Goldman Sachs, JP Morgan making some big moves back and forth here, and I just think that as some of the market gets back to “normal trade”—what do I mean by that? Just where we’re not maybe anticipating a tweet every day, even though that risk is still there—we’re going to see, in my opinion, some of these banks really start kicking in on the M&A side. And that’s going to be reflective in their results later on in the year.

Jeff Praissman

Once these banks feel a little bit better about the overall economic situation, they’ll feel a little bit more empowered to go about their business and not be worried about everything changing so quickly.
Scott, this has been great—love having you in our studio.
For our listeners, you can find more from Scott on our website under Education, as well as at prospertrading.com.
And Scott, until next time—look forward to hearing from you.

Scott Bauer

Thanks, Jeff. Appreciate it, as always.