The VIX cropped up in the mainstream media this week, this time on MarketWatch, which brought something to my attention that I hadn’t realized. The VIX rallied 14.5% in the month of August, marking the largest August VIX spike since 2001. Even after getting plowed Tuesday, the VIX still showed a 10.8% lift for the month.
But we need to put this VIX lift in perspective.
Here’s a chart of VIX over the past month:
This chart makes a pretty strong statement. But now look at the VIX over the last two months:
Not such a strong picture, is it?
The VIX actually declined 24.6% since the end of June. It started at a high reading (34.55), then got smacked 32% in July alone, as MarketWatch notes. So the big decline was a combination of that high start and a strong July market.
And in August, we saw a reverse. The VIX ended July at 23.05, very near the post-flash crash lows, and then the market itself drifted.
As you can see, VIX analysis requires context. Pick a random time frame and you may see some oddities. In the two-month time frame, the S&P 500 (SPX) has rallied 1.8%, yet the VIX declined 24.6%. That sounds like extreme complacency, but again, that’s a time period that began with the VIX on a high. In August alone, SPX dipped 4.7%, while the VIX rose 10.8%. All things considered, that’s not that strong a VIX.
And perhaps that partially explains the second part of the article, the really ugly iPath S&P 500 VIX Short-Term Futures ETN (NYSE: VXX). It actually dipped 3% in August.
As per the MarketWatch article: “‘Because many institutions use [VIX] futures to guard against adverse market movements, the prices of longer-dated contracts include sizable insurance premiums that disappear as they move toward expiration,’ wrote Morningstar ETF strategist Paul Justice in an analysis of the product. ‘This produces a large negative roll yield, so this ETN will lose money during periods of market stability and constant volatility,’ he added.”
That’s very true. And on top of that, future volatility assumptions have simply tapered off, as the VIX really didn’t show anything special in August, beyond simply popping on a market dip.
But as long as we’re having fun with numbers, how about we add one more day to the mix?
The VIX got clocked yesterday. Since cutting off at exactly one calendar month begets rather arbitrary analysis, one month and one day is just as good (bad). And over that stretch, the VIX has lifted all of 1.7%, while the SPX declined 1.9%.
I think it’s safe to conclude we should avoid overanalyzing each blip in the VIX.
Follow Adam Warner on Twitter @agwarner.
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