VIX Milestones, Plus a Prediction

Yesterday was an interesting trading day no matter how you slice it. When all was said and done the SPX had its highest close since February 9th and moved as close as it has been to its 200 day simple moving average (SMA) since September 26th of last year.

The VIX hit some interesting milestones as well. Yesterday’s close of 35.79 was the lowest close since that same September 26th and the 10 day SMA of the VIX is under 40 (as of yesterday) for the first time since the beginning of October. Elsewhere in the VIX family, the iPath S&P 500 VIX Short-Term Futures ETN, (VXX), is now at its lowest level (94.91) since its January 30th launch. Finally, the 10 day historical volatility in the SPX is at a 10 week low (31.18) and 20 day HV just slid below 40 for the first time in 6 weeks.

While the numbers above represent an incremental change in volatility, they also reflect a sea change in investor outlook. Just a few weeks ago it was widely believed that all the banks were insolvent, the economy was not going to turn around until 2010 and if we were lucky, the housing market might bottom before the end of the year.

A flicker of hope here and a flicker of hope there and now suddenly some of the worst case scenarios are being discarded. Perhaps it is just a case of the slowing pace of economic deterioration, but there is always the possibility that things have already started to turn up. After six months of bad news getting worse and worse news morphing into terrifying, even just being able to set aside a couple of the potential disaster scenarios seems to be cause for celebration. But, are the celebrations premature?

Volatility is notoriously difficult to predict, but my personal forecast is for the recent decline in volatility to drop to no lower than the 30-32 level before flattening out, perhaps just in time to meet the 20 month SMA in the (monthly) chart below (click to enlarge).

If you have not looked into or traded VXX, next week might be a good time to think about hedging or speculating on an upside move in volatility with this VIX ETN.

Comments

[Archer:]

looking for tom demark studeis, they predict, that reversal could be today..

don't know about vxx, thx

Apr 17 03:13 AM

[ArkansasAngie:]

Volatility is decreasing? Why?

If we take as given (and yes I know it isn't just a given) that approximately 35% of volume is program trades and that another 35% is speculators that leaves only 30% for investors.

Perhaps volatility is decreasing because "they" succeeded in chasing off their suckers ... uh … investors.

Here's an idea. Let's tax the heck out of gains made in 90 days or less and do away with capital gains taxes on anything held over 3 years.

Almost all gains made in less than 90 days are a result of the system and not productive use of capital. If the system generated the profit situation then the system should be paid.

So ... what do we do? We give hedgefundsters a tax break.

Yup ... there are some smart cookies in DC and on Wall Street. They've scammed the system superbly.

Apr 17 06:53 AM

[Moon Kil Woong:]

Usually when VIX drops in a bear market it is a good signal to buy puts on your current positions if not go short.

Ooops, I'm giving away trade secrets. How do you think traders make $ off of bear market? Up they win, down they win, everywhere around they win because too many people don't play volatility or hedge their positions when the price is good.

Apr 17 08:11 AM

[sr9web:]

Thanks , Post more tips


On Apr 17 08:11 AM Moon Kil Woong wrote:

> Usually when VIX drops in a bear market it is a good signal to buy
> puts on your current positions if not go short.
>
> Ooops, I'm giving away trade secrets. How do you think traders make
> $ off of bear market? Up they win, down they win, everywhere around
> they win because too many people don't play volatility or hedge their
> positions when the price is good.

Apr 17 09:26 AM