The Week that Was: Jan. 25 to Jan. 29

A concise weekly overview of the U.S. equities and derivatives markets 

Last week (January 25 to 29), equities markets saw the largest weekly decline in three months. New economic data pointed to potentially slowing growth, with fourth-quarter 2020 gross domestic product (GDP) coming in at an annualized increase of 4.0%, falling short of expectations it would reach 4.2%. Full-year 2020 GDP declined 3.5%, marking the first year-over-year contraction since 2009. Consumption also slowed in the fourth quarter of 2020 and retail sales numbers have declined each month since September, following the start of the second wave of COVID-19 infections. Housing data continues to be an economic bright spot, as new residential construction and new residential sales are both higher. However, some observers believe there are pockets of froth in the market, while others argue the activity in recent weeks and months is indicative of a larger asset bubble. This is all happening amid a backdrop of easy monetary and fiscal policy, strong breadth and improving corporate earnings data, all of which are not typically associated with market tops but time will tell whether this week was an inflection point. In the meantime, current readings on the VIX™ Index and VIX futures curve are indicative of persistent uncertainty as the market prices a “new normal.”

Quick Bites

Indices

• S&P 500 Index (SPX): Declined 3.3%, ending January down 1.1%
• Nasdaq 100 (NDX): Declined 3.3% but was unchanged on the month
• Cboe Volatility Index™ (VIX Index):  Higher by 11
•  The Russell 2000 Index (RUT℠): Dropped 4.7% but remains up 4.7% year-to-date

Options

• SPX options volume averaged about 1.28 million contracts per day, up from 1.13 million the previous week. Friday was the most active session with 1.7 million SPX options on the tape. This was the most active week for SPX options since September 4, 2020.
• VIX options averaged approximately 932,000 contracts per day, compared to roughly 459,000 per day the previous week.

Charting It Out

Observations on VIX Futures Term Structure and VIX Options Volume

• The VIX futures curve moves from contango to backwardation.
• The Month-1/Month-2 spread moved 1.75 in February’s favor week-over-week.
• The front five VIX futures settled at 30 or higher.
• The VIX Index is at approximately 33, pricing 2.1% daily SPX Moves while 1-month at-the-money SPX implied volatility is pricing 1.6% daily moves.

VIX Futures Term Structure

Source: LiveVol Pro

• The chart below depicts weekly VIX options volume for the past year. This week, VIX options volume reached highs not seen since March 20, 2020.

VIX Options Volume from February 2020 to January 2021

Source: LiveVol Pro

Growth in SPDR S&P Retail ETF

• The SPDR S&P Retail ETF (XRT) was up 16.6% on the week. The $665 billion ETF is up 96% over the last 52-weeks. GameStop (GME) is the third largest constituent in the ETF. Options volume on XRT was also unusually high.

XRT Growth Since February 2020

Source: LiveVol Pro

Macro Movers

• U.S. 10-year yields traded in a wider range last week, between 1.10% and 1.00%, settling near the high end of the range. Yields saw lows on Wednesday during the Federal Open Market Committee (FOMC) meeting and broad market sell-off.
• Lumber has been exceptionally volatile in recent months, approaching all-time highs around $1,000 per board foot.
• Silver futures are up about 6%, in part due to online chatter about big bank shorts and a history of suppression.
• Big Tech: Apple, Facebook, Amazon and Tesla were lower week-over-week. Microsoft traded higher after a strong earnings report that showed substantial growth in its cloud business.

Tidbits from the News

• Equity options saw record volume in January, with average daily volume (ADV) reaching about 43,500 contracts. For context, equity options ADV between 2018 and 2019 was about 20,000 contracts per day. 

Options Volume from 2018 to Today

Source: Trade Alert

• The “Seasonal Flu” essentially disappeared in 2020. 

Source: Chartr

• Aside from China, the top 20 global economies contracted last year (based on GDP). The Chinese economy grew at an annual pace of 6.5%, despite the pandemic. Unemployment remains a widespread concern in 2021. 

Source: The Economist

The Week Ahead

• Another big week for earnings with 110 of the companies in the S&P 500 expected to report.
• ISM Purchasing Index, also known as the Purchasing Managers’ Index (PMI) will be published.
• January non-farm payroll data will be released.

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The information in this article is provided for general education and information purposes only. No statements within this article should be construed as a recommendation to buy or sell a security or futures contract or to provide investment advice. Supporting documentation for any claims, comparisons, statistics or other technical data in this article is available by contacting Cboe Global Markets at www.cboe.com/Contact. Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of “Characteristics and Risks of Standardized Options.” Copies are available from your broker or from The Options Clearing Corporation at 125 South Franklin Street, Suite 1200, Chicago, IL 60606 or at www.theocc.com. Cboe Volatility Index and VIX are registered trademarks and of Cboe Exchange, Inc. All other trademarks and service marks are property of their respective owners. © 2021 Cboe Exchange, Inc. All Rights Reserved.