Bye-Bye Brexit?

Includes: DIA, IWM, QQQ, SPY, VXX
by: Peter F. Way, CFA


There appears to be a sea-change in market outlook over the weekend.

That is reflected in shifts in the VIX index.

Expectations of coming market prices can be, will be, and are being influenced by more than simple fundamentals and economics.

Monday morning opening suggests a strengthening market

  • The curbside assassination of a British MP apparently has had an "unintended consequence"
  • Witness description of the incident reported the perp to have shouted slogans used by groups favoring Britain "Out" of the EU.
  • Reaction by the public may have put "Out" out of any possibility. If so, take one uncertainty out of stock market contemplations.
  • Similarly, with 51 State Department knowledgeables in an uprising against recent and current U.S. policies, new focus arises on upcoming national leadership elections here.
  • One candidate and her campaigner-in-chief clearly advocate "stay the course" while the other represents "time for changes". Does that new focus reduce or increase market uncertainty?

The VIX index closed Friday at 19.2, and opens at 17.5, currently is 16.7, down -14.5%.

It may not stay there. But first blush reaction is trouble for market shorts.

Here is some perspective for those not familiar with how the VIX index behaves:

Figure 1

Click to enlarge


This is a picture of how market professionals in the derivatives markets (providing liquidity to the equities markets) view current UNCERTAINTY in the equities market, in terms of the VIX index, the most left-hand set of dots in the picture. As the data window details, over the past 6 months the VIX has ranged from a high of 28.14 to a low of 13.10. As of the end of day [NYC] 6/17/16 it was 19.41.

Each of the dots to the right of the VIX representations are next-expirations of VIX futures pricing months, M1, M2. . . M7. In Futures parlance, the shape of a declining "strip" of such contracts (like the highs) is "backwardation" while a rising one (the lows) is called "contango".

Stock prices tend to move in the opposite direction of the recent appearance of VIX prices. So a contango condition in the VIX futures tends to be a sign of strength for coming prices in stocks, generally.

Then the bullet-points described above occurred. Now that strip of VIX futures looks like this:

Figure 2


The faded images are how the Strip looked on Friday. The bold dots are current, and the negative percentages above them are the changes between then and now.

On Friday, as we do every market day at the close, our analysis of the hedging activities of professional market-makers (protecting firm capital at risk from block trade facilitations) showed the implied price range forecasts for the VIX index this way:

Figure 3

(used with permission)

That day's forecast range was a nearly equal upside payoff of +22% versus an experience of drawdowns from similar prior forecasts of -23%. The odds of ANY profit from a buy at Friday's VIX close were 55 out of 100 (a coin-flip) and the actual prior forecast experiences were gains of only 6.1%, not 22%. That produces a stinking credibility ratio of 0.3, when a +22% actual gain would give a 1.0 ratio.

The small blue "thumbnail" picture of the frequency of actual VIX prices in relation to their then current forecasts show that the Friday VIX price was already far above the usual forecast experiences.


We see a comfortably secure market between now and Labor Day, when returning big-money portfolio managers return to work from their "Hamptons". Then November contemplations will tend to rule the market outlook

Additional disclosure: Peter Way and generations of the Way Family are long-term providers of perspective information (earlier) helping professional and [now] individual investors discriminate between wealth-building opportunities in individual stocks and ETFs. We do not manage money for others outside of the family but do provide pro bono consulting for a limited number of not-for-profit organizations. We firmly believe investors need to maintain skin in their game by actively initiating commitment choices of capital and time investments in their personal portfolios. So our information presents for their guidance what the arguably best-informed professional investors, through their own self-protective hedging actions, believe is most likely to happen to the prices of specific issues in coming weeks and months. Evidences of how such prior forecasts have worked out are routinely provided. Our website, has further information.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.