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Volatility Moves Higher at Quarter End

David Becker
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Implied volatility moved higher in the past week, climbing as tension in Iraq continued to keep investors on edge. Seasonally, the late spring and summer months is usually the most active time for the volatility indices, but the concept of sell in May and go away has failed to generate the normal market selloff the investor expected to experience.

U.S. stocks were under pressure late in the week on the heels of a revision to Q1 GDP. Although expectations were for a decline, few expected the revision to be so extreme. U.S. Q1 GDP growth was revised sharply lower to a -2.9% rate from -1.0% previously in the second, and a 2.6% Q4 pace. That’s much worse than even the most pessimistic forecasts.

On Thursday, data continued to show lackluster results. U.S. May personal income rose 0.4% with spending up 0.2%. The 0.3% April income gain was not revised while the 0.1% dip in consumption was bumped up to unchanged. However, March’s 1.0% gain was nudged down to 0.8%. Wages and salaries were up 0.4% last month after a 0.3% April increase. Disposable income rose 0.4% too versus 0.4% in April. The savings rate rose to 4.8% from 4.5%. The chain price index and the core rate were each unchanged at 0.2%.

The VIX hit a 7-year low near 10.50% in the prior week and was able to bounce running into resistance near the 50-day moving average at 12.35%. The next level of target resistance for the VIX is seen near the 200-day moving average near 14%.

Momentum on the VIX has turned positive with the MACD (moving average convergence divergence) index generated a buy signal. This occurs when the spread (the 12-day moving average minus the 26-day moving average) crosses above the 9-day moving average of the spread. The index moved from negative to positive territory confirming the buy signal.

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