Do NOT let the Employment Situation report catch you off-guard like the horrendous blind-side from the Employment Situation report last month.
Remember February 2, 2018. The Labor Department reported that average hourly earnings for private-sector workers rose 2.9% in January from a year earlier, their largest year-over-year increase since June 2009, when the last recession ended.
The VIX took about 2 hours to start rising after the report.
With average hourly earnings rising so much, traders began to price in the reality of 3 or 4 rate hikes by the end of 2018. By the end of the day on Friday, February 2, 2018, the VIX was up 28.5%. On Monday February 5, 2018, the short vol trade began to unwind and the VIX soared, ultimately resulting in the biggest market correction in years.
Fast forward to the present. This Friday, March 9, 2018, the Employment Situation report will be released.
The VIX is fairly calm heading into the Friday Employment Situation report:
I think the resistance level on the VIX to watch is 22.75 (yellow line). If we get a break above this level, I think we have to get out of the market and move to cash as I’m not convinced the short vol trade has completely unwound. Bloomberg estimated that there was $2 trillion worth of derivative VIX trades open. I can’t image that the short vol squeeze we saw was $2 trillion worth of VIX trades unwinding and being closed. I think a lot of traders went back to shorting volatility. What could make the VIX spike from the Employment Situation report? If hourly wages are above 3% year-over-year, I think we get a big sell-off again. That means that as long as hourly wages do not exceed 0.2% month-over-month, I think we are fine.