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The VIX started showing signs of life this week, a development that historically doesn’t...

The VIX started showing signs of life this week, a development that historically doesn’t bode well for stocks. The so-called fear index closed above 20 Thursday for the first time this year before pulling back a bit yesterday. The odds of a market rally over a three-, six- and 12-month time horizon are at their lowest when the VIX is 20-25, according to Citigroup data that goes back to 1990.
Comments (11)
  • bbro
    , contributor
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    This is interesting work...would love to see the data...where you are in the business cycle would be a great filter....
    22 Jun 2013, 08:30 AM Reply Like
  • dancing diva
    , contributor
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    I've looked at the data - it doesn't have much predictability and appears to be a coincident indicator. However, if the level is sustained above 20 for a long time it's clear the market is nervous and signals the trade is more likely to sell rallies. I'm watching the 200 week moving average, just below 21, for clues. The vix briefly spiked near 22 on Thursday but backed off to close below 19. The vix hasn't closed on a weekly basis above its 200 week moving average since the summer of 2011 - the last time the S&P had more than a 10% correction.
    22 Jun 2013, 11:23 AM Reply Like
  • Third Eye Market Analyst
    , contributor
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    VIX historically has 3 equilibrium range levels--the median ranges depending on whether SPX is moving up or down and in relation to its moving averages . 1) low equilibrium median range 13-18. 2) Historical average median range 18-24, and 3) high equilibrium median range 20-28. Here is link to my past seekingalpha article http://bit.ly/11UUE7L

     

    Whether intended or not, global central banks' actions (especially from Japan) have elevated structural volatility away from the low equilibrium range back more towards normal. I would expect at this moment that the new range could be 15-20, which would be healthy for the markets.

     

    Historically, when VIX remains in a low equilibrium environment for too long, market bubbles form. According to concepts by Nassim Taleb's anti-fragility, reintroducing some volatility to the system would be a healthy development over the long run. Of course, the risk is volatility getting out of control and VIX moving back to a high equilibrium.
    22 Jun 2013, 02:20 PM Reply Like
  • yborcat
    , contributor
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    we basically have a stock market bubble driven by the feds,and like in the housing bubble,this bubble will burst as well,maybe this is the beginning,because we keep forgetting the law of gravity,what goes up will come down,unless there is an engine that drives it up,in this case the feds,but engine is running out of fuel,my guess is that the stock market is heading down,at times a little faster than you would expect,but it is heading down
    22 Jun 2013, 03:00 PM Reply Like
  • Settled Risk
    , contributor
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    Self disclosure: I currently own XIV.

     

    There is a really nice and helpful graph in the article under the link "historically doesn't bode well for stocks", a WSJ article and well worth looking at.

     

    The graph illustrates the percentage growth of the VIX in different 5-point increments 10-14, 15-20, 20-25... 55+ ... and the likelihood of growth within that framework.

     

    The highlighted part of this graph is 20-25 as the premise summary above illustrates. The problem with this analysis is that in one day the VIX tipped 20-25 and now is back in the 15-20 segment with the VIX on Friday, June 22, at 18.90.

     

    The graph is helpful. I'm not so sure the analysis of the WSJ article is or its summary above is as well.

     

    An historical review of the VIX consistently shows that parabolic spikes to 20 and then equally violent spikes reverting downward again have been the norm over the last several years.

     

    I think our questions now should be related to the FED and QE dilution and whether the VIX will remain higher because of that? Or... Are we simply in a transitionary period where the market has to adjust to the news before reverting back to a more settled VIX.

     

    If the conclusion of the article is that with QE dilution we will see a VIX in the 20-15 range, I would caution the reader to reconsider that thesis and come to their own conclusions.

     

    We are in uncharted waters historically. I don't believe we have sufficient data or reference points to draw appropriate and verifiable conclusions. I think advising people that the next 3-, 6-, or 12- months will be poor because the VIX was between 20-25 on Thursday of last week might be something to reconsider.

     

    How do we deal with QE dilution and the VIX seems to be the elephant in the room for volatility traders? Is this a psychological bli that reverts to a norm? Is this a new outlook altogether with a higher VIX for the future?
    22 Jun 2013, 03:29 PM Reply Like
  • taylz
    , contributor
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    The rug hasn't been pulled here. The Fed's in and committed until the data improves(and we have a long way to go to hit those targets). We held the 100 day on friday, which is good. If bonds stablize and we get a decent(but not too good) number on the housing data, the bear trap could spring and cause a massive short covering rally and an instant push up to the 50 day...Somebody once said, "Be greedy when others are fearful"...
    23 Jun 2013, 04:18 AM Reply Like
  • Brian Teeney
    , contributor
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    Another thing to watch is when the VIX 50 day moving average crosses above the 200 day MA. It's almost there now. Unfortunately it's not always a leading indicator.
    22 Jun 2013, 03:35 PM Reply Like
  • taylz
    , contributor
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    Key Words, "Not always a leading Indicator"....but thanks for the heads up. Worth keeping an eye on..
    23 Jun 2013, 04:23 AM Reply Like
  • Settled Risk
    , contributor
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    Brian, I was wondering if you would be willing to expand on what you wrote a bit because I didn't get the obvious conclusion. A bit of a newbie in some areas. So when you say to watch the VIX 50-day MA cross above the 200-day MA and that is a leading indicator... what does it indicate? Thanks.
    23 Jun 2013, 02:57 PM Reply Like
  • Jake2992
    , contributor
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    It indicates nothing. Why would you be long xiv when vix is range bound by definition and is at the lower end of its range?
    23 Jun 2013, 07:34 PM Reply Like
  • Brian Teeney
    , contributor
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    I would say there is about an 80% chance (4 out 5 times in the last 6-7 years - a very small sample) that when the VIX 50 day MA crosses over the 200 day MA the VIX goes parabolic to at least 45. The last time this happened was July 2011. If you had bought VXX (UVXY didn't exist yet) when this occurred you would have bought VXX in the low $20s and sold for a double a month later. VXX topped out in this case at the end off September at $53. Also in this case it was great leading indicator and it may be this time as well.

     

    However, if the VIX explodes upwards off a low base the 50 may cross the 200 after the big move has already been made. So it wouldn't be a leading indicator.And finally, one of the times this movement occurred the VIX fizzled at around 30. Good money could have been made but realistically, you probably would have given the profits back waiting for the next leg upwards, which never came.
    23 Jun 2013, 08:49 PM Reply Like
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