In my Wednesday post I introduced the Z-Score and also explained how we use it for scoring implied volatility, making it the IVZ-Score. What I didn’t focus on much is why one would do such a thing in the first place, and the underlying purpose may not be immediately apparent to some. Now I already can sense your eyes glazing over plus it’s Friday, so I’ll promise to make this brief and actionable for non-nonsense traders mainly interesting in turning a buck.
The implied volatility Z-score is a way of framing implied volatility in context. For example, today SPY closed up 0.35%, which is decent but nothing compared with some of the candles over the past few months. But how normal or abnormal is it? We don’t know unless we’re able to put it in context.
I was born with a fairly pale complexion which has always forced me to stay out of the sun lest I end up looking like a roasted chicken after only minutes of being exposed to a UV index anywhere above 5. It’s not that I hate the sun – rather the sun seems to hate me, or at least it hates my skin as it insists on burning it. As a financial blogger who also trades for a living it’s easy to understand that summer is my least favorite season of the year.
We are only eight months into the year but for all intents and purposes 2020 will be remembered by future historians as a year of explosive change and implacable economic Darwinism. At no other moment in time was there ever the possibility of shutting down a nation’s entire economy – let alone a global one – due to war, disease, or any other reason. It didn’t happen during WW1, neither did it happen during WW2, the Spanish Flu in 1918, the American polio epidemic in 1916, or the Asian flu in 1957.
Big tech was stomped again over the past few sessions but the current retracement still lies within the parameters of a regular late summer shake down. What is a bit more disconcerting to me is the marked increase in realized (historical) volatility, which usually is indicative of a late stage bull market top. Since big tech has been leading this rally this would have major implications to equities across the board.
The greenback seems to be in the process of forming a floor pattern despite ongoing negative narrative by the financial MSM. Although I happen to have a dog in this fight my general perspective remains to be one of skeptical optimism as the Fed continues to exert massive headwind against a stronger Dollar.
“Hello, is this TOS customer support? Finally, I was on hold for over 20 minutes! Anyway, I think something must be wrong with my installation, my daily gold futures chart just printed a red candle.” – “Are you certain, sir? Have you tried relaunching the platform?” – “Yes, I even rebooted my system twice – the candle is still red!” – “Okay, don’t panic sir, the system must be experiencing a data feed problem. I’m sure our tech guys will have this fixed in no time!”
Make no mistake – the current surge across numerous U.S. asset classes has very little to dow with good old fashioned value generation and is simply a natural response to the systematic destruction of the U.S. Dollar. It’s also part of a narrative that strangely seems to be favored by both sides of the political isle – for different reasons. In other words, rapid loss of confidence in the greenback is pushing asset holders into whatever tangible they can get their hands on.
Every year here at the beginning of August the entire country of Spain enters into a one month long hibernation period. Although major retailers and stores are open most of the small ones close up shop and head out to the old ‘pueblo’ or their 2nd properties near a beach to spend quality time with the family. Good luck trying to get a hold of a doctor, dentist, attorney, plumber, what have you – everyone’s MIA until the end of the month.
If you’ve ever been to Iceland then you may have come across this expression: There is no such thing as bad weather, just bad clothing. Well, if you happen to to hold any significant amount of Dollar assets these days – and as you are reading this blog I suspect you do – I recommend you better stock up on stormproof winter gear as conditions appear to be getting uglier by the day.