E-Mini S&P 500 Futures Fall 1.4% on Disappointing Nonfarm Payrolls

In case you missed it earlier this morning, after a nonfarm payrolls report that indicated 120,000 jobs were created in March, approximately 80,000 short of consensus expectations, equity futures fell approximately 1.4%, with the E-mini S&P 500 futures (/ES, shown in graph below) falling to 1372 – a level not seen since March 13^th.

Coming on the heels of three days of declines, another 1.4% move down would bring the peak to trough pullback to about 3.5%, which represents half of the 7.0% median pullback we have witnessed since stocks bottomed in 2009. [See Putting the Current 2.6% SPX Pullback in Recent Historical Context for additional details.]

Investors who have benefitted from the 32% gain in the S&P 500 index since the beginning of October are no doubt going to be quick to protect profits in an environment where the consensus is that stocks are long overdue for a pullback. What we have lacked until recently has been a catalyst for that selloff. Tuesday’s FOMC minutes, in which the Fed seemed to be much less inclined to move in the direction of QE3 or other stimulus measures seemed to catalyze sellers. Today’s nonfarm payrolls data provided another catalyst, but it may not be as powerful as some expect. Initial jobless claims continue to trend down and suggest an employment market that is flat or improving, which raises the possibility that the March nonfarm payrolls were a statistical outlier and/or will look stronger in light of future revisions to today’s data.

Perhaps most important, however, weakness in employment is exactly the issue that will cause the Fed to rethink the likelihood of further stimulus measures, up to and including QE3. At the very least, today’s nonfarm payrolls undermines concerns about the growing hawkish stance evident in Tuesday’s FOMC minutes from the March 13^th (there is that date again) meeting. Whether it is current out-of-the-money or at-the-money, the looming presence of a Bernanke put should not be overlooked.

Related posts:

• Putting the Current 2.6% SPX Pullback in Recent Historical Context
• Economic Data: Divergence or Confirmation for Stocks?
• Dynamic VIX ETPs as Long-Term Hedges
• Comparing SPLV and VQT
• Three New Risk Control ETFs from Direxion
• The Case for VQT
• The Year in Safe Havens
• The VIX as a Hedging Tool
• Why Not Point Hedges?
• The Dangers of Anticipating a Market Reversal

[source: thinkorswim/TD Ameritrade]

Disclosure(s): none

Historical Volatility Pointing to a Sub-20 VIX

Just as I get in an extended discussion of historical volatility (HV), I note that the combination of 10/20/30/50/100 day HV has plummeted to levels not seen since mid-October 2007, which happens to be one week after the all-time high in the S&P 500 index.

It is worth noting that back in mid-October 2007 when the similar HV numbers were posted, the VIX was hovering around the 18.00 level.

With the VIX Holiday Crush starting to kick in and the drama associated with today’s FOMC meeting now behind us, I now believe there is about a 50% chance that the VIX dips below 20 in the next two days, even with the E-mini S&P 500 futures (/ES) down 4.50 as I type this. The alternative, which has been the status quo as of late, is that the 20 area acts as support for the VIX and triggers resistance in stocks.

Now the VIX does not have to follow historical volatility religiously, but if HV continues to fall, the case for a 20+ VIX will deteriorate rapidly. Substantial divergences tend to have a relatively short life. With the current divergence now at six trading days, the VIX can only defy gravity for a short while longer…

For more on related subjects, readers are encouraged to check out:

• VIX Holiday Crush
• VIX of 20 Spurring Market Correction?
• What Is Historical Volatility?
• Calculating Centered and Non-centered Historical Volatility
• Thinking About Volatility (First in a Series)

Disclosure: none