Is period of low volatility coming to an end?

Selling volatility in 2012 and 2013 has funded many a vacation home, but one favorite - the VelocityShares Daily Inverse Short-Term Futures ETN (XIV) - is down 5% this year

"The absence of net sellers of VIX is remarkable," writes the team at SocGen, noting historically, hedge funds - with long equity positions elsewhere - "have a strong natural bias toward net selling the VIX." Given a market in contango, it pays even more to be short, yet they still aren't.

The risk of a spike in volatility thanks to geopolitical tensions with Russia may be having an influence, but alone don't explain the trend, says SocGen, which concludes the period of low volatility is coming to and end.


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Comments (12)
  • leopardtrader
    , contributor
    Comments (3832) | Send Message
    VIX could rally with S&P500 contrary to the conventional wisdom. It happened before from 1992~1998. I believe we are within same situation of both parabolic rally in S&P and VIX. After all VIX is supposed to be an options based forecasting mechanism for future 30-days movement of S&P without necessarily direction. Because S&P moves down faster than up many people erroneously believe VIX and S&P500 must be inverse related. That is not the reality ! That is why investors must understand that past performance not guarantee for future is a wise saying
    2 Apr 2014, 04:37 PM Reply Like
  • Barry North
    , contributor
    Comments (325) | Send Message
    Great comment. I did a combined chart of the SPX and VIX going back to 1990 and noticed the effect you mention, and wondered what it was about. Essentially I suppose, it is the option traders saying the bull has to end at some point and they start to trade accordingly.


    Maybe the option traders, amongst other indicators, are watching the Market Capitalization to GDP ratio. This site tracks the data.



    At 1.26 the ratio is the now the second highest it has been in modern times, at least since 1950, and has only been higher during the period in 2000. It is rumored that Warren Buffett, who describes the ratio as, "probably the best single measure of where valuations stand at any given moment", is concerned that a market correction could be imminent.
    3 Apr 2014, 12:09 AM Reply Like
  • idkmybffjill
    , contributor
    Comments (1919) | Send Message
    Buffett said Market Cap to GNP, not GDP.
    3 Apr 2014, 12:13 AM Reply Like
  • Barry North
    , contributor
    Comments (325) | Send Message
    I stand corrected, apparently he first made the observation in a speech back in 1999 and correctly predicted the 2000 correction. Here is a 2001 article referring to it



    and a more recent one



    Whether the ratio is calculated by using GDP, 1,26, or GNP, 1.42, both ratios are far too high for comfort.
    3 Apr 2014, 12:54 AM Reply Like
  • idkmybffjill
    , contributor
    Comments (1919) | Send Message
    Yes, I certainly agree with you that both are too high for comfort. Just wanted to correct the GNP vs. GDP, since GNP is better correlated with earnings, since it includes US company earnings from abroad (vs. GDP only includes what is generated in America alone).
    3 Apr 2014, 01:12 PM Reply Like
  • Barry North
    , contributor
    Comments (325) | Send Message
    Absolutely. With so many US companies being global players these days, GNP is probably even more pertinent today that it was when Buffett first raised the issue.
    3 Apr 2014, 03:53 PM Reply Like
  • NadgesNokindo
    , contributor
    Comments (45) | Send Message
    About time, it's been painful!
    2 Apr 2014, 04:40 PM Reply Like
  • convoluted
    , contributor
    Comments (2503) | Send Message
    Shorting volatility has been the contra play to shorting the mortgage market back in 2008. But, you have to ask yourself, 'how many more times can I go to the well?'
    It's human nature to milk a cow for all it's worth. In this case, it's been about defective products in addition to a macro trend.
    Is the world a more volatile place than recognized? One would think so, but the other counter-weight is the vast liquidity supplied by the Fed.
    I have noticed a bit of coefficient drag relative to diminishing expectations. Probably a rise in interest rates will increase volatility. Until then, spikes will be shorted.
    2 Apr 2014, 05:05 PM Reply Like
  • idkmybffjill
    , contributor
    Comments (1919) | Send Message
    The vast liquidity supplied by the Fed provides a false sense of security, which is why the next major volatility spike will likely be much larger than anyone expects.
    3 Apr 2014, 12:07 AM Reply Like
  • vol trader
    , contributor
    Comments (3) | Send Message
    It would make sense to protect your longs
    3 Apr 2014, 01:10 AM Reply Like
  • subaham1
    , contributor
    Comments (72) | Send Message
    The Ukraine is holding a presidential election on May 25th. It was originally supposed to be held in February 2015. The leading candidate, Poroshenko, is regarded as a moderate.


    Putin does not want this election to happen -- it would undermine his argument that the ethnic Russian population of Ukraine is under threat from far-right militants whom he describes as neo-fascists.


    Look for another Crimea scenario to take place in the next weeks -- and a volatility spike.
    3 Apr 2014, 06:40 PM Reply Like
  • hummerh25
    , contributor
    Comments (99) | Send Message
    Looks like the party's over in the market for a while.
    Remember all the new IPO's in the last big market down turn. Well it looks like it is happening again.
    VXX is the way to go.
    5 Apr 2014, 07:05 PM Reply Like
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