Well, maybe instead of banning the VIX, they should ban options folk like yours truly from writing about it.
Since I noted that the CBOE Volatility Index (VIX) observations coming from the options realm tend toward the nonsensical, much of what they’ve said has come true. At least for a few days…
In my last article, I said that the VIX is given far too much weight, because it is merely a reflection of market sentiment, but doesn’t actually lead the market anywhere.
But, currently, the VIX is leading the market lower.
The VIX has rallied about 10 points, or 65% off lows touched as recently as two weeks ago, while the market, as measured by SPDR S&P (SPY), has dropped about 4.5%.
Whoa, wait a sec, 65% VIX rally and a less than 5% market drop?
OK, so maybe that’s not “leading” the market lower. A better interpretation is that it’s portending future ugliness. Serious ugliness. Or that it has become way too fearful, way too fast.
Personally, I believe the latter. The VIX has jumped too far, too fast. I do advocate VIX charting, at least not in the same manner that you would chart a regular stock. The VIX is a statistic, so the nature of supply and demand is quite different. But the VIX mean does revert, so short-term moving averages can come in handy.
As I type, we’re hovering between 25% and 30% above the 10-day simple moving average (SMA). Anything greater than 10% is considered stretched. We have also surged past two standard deviations Bollinger band off the 20-day SMA.
As to the intermediate-term bullish trend, the fact that an overbought VIX has produced nary a rally in the market does not bode well. But, in the shorter term, it is likely to correct.
As to the VIX itself, it is at least justified by an uptick in market volatility. Ten-day realized volatility in the SPY hovered between 7 and 10 from mid-March through mid-April, making a VIX in the 15-18 range actually quite high.
Now, however, 10-day historical volatility is in the low 20s. The VIX here is actually in line with that, although for the VIX to sustain these levels, the market itself would have to remain this volatile.
But here’s where it gets interesting. Trading VIX products like Barclays iPath S&P 500 VIX Short-Term Futures ETN (VXX) and VIX futures normally assume blips in the VIX itself are just that, blips. They trade at premiums when the VIX is weak, like it was until a couple of weeks ago. And they tend to trade at discounts when the VIX pops, like we’re seeing now, although the VIX first has to make up the premium.
May VIX futures do, in fact, trade at a discount now, but not as much as one might suspect, hovering near $1. What’s more, the VIX future is tracking the “cash” VIX pretty well, i.e., maintaining that $1 discount, even with the VIX blast this morning.
July futures still trade at a premium, another development I would not have expected if you told me the VIX would run fairly rapidly into the mid-20s.
So, like I said, there are two conflicting interpretations. One is that the futures, like the VIX itself, are predicting more tumult in the market. The other is that there’s too much fear.
You know which view I take. And keep in mind that VIX futures anticipated an uptick in volatility for 10 months, and now that they’ve got it, they seem to want more.
Related Articles:
- Predicting Volatility With the VIX
- A Glitch in the VIX
- Can the VIX Tell You When to Get Long or Short?
The Options Trader’s Guide to Technical Analysis
In his latest report, learn how John Lansing leverages the power of technical analysis to identify the short window when a trade is set to go straight up or down. Get your FREE copy here!
