Market Volatility Bulletin: VIX Heads For Low 30s While Stocks Take A Joy Ride

Apr. 27, 2020 1:06 PM ETAAXJ, IWM, SPY, VGK12 Comments
The Balance of Trade profile picture
The Balance of Trade


  • US stocks head higher as the week begins, while spot VIX scurries into the low 30s.
  • We never really get the counterfactual.
  • VX term structure brought low, while spot VIX trades at its bottom going back to early March.

Market Intro

Monday Close - CNBC

US equities are matching the tone of international markets (AAXJ, VGK) as the new week commences. SPY is up nearly 1.5%, to near 2900, and the Russell 2K (IWM) has marched higher to the tune of 3%.

What's not doing as well? Volatility: spot VIX is down about 10% to near 32, after notching levels right around 40 as recently as Friday morning.

Thoughts on Volatility

Interesting question, Mr. Cole.

I suppose the answer more or less relates to whether:

  • A lender of last resort would be ready, willing and able to continually extend credit to such an insolvent operation
  • If such a creditor could indefinitely maintain the support of the public

If the answers to both questions were "yes", then I suspect that we could indefinitely extend liquidity to any and every operation that found itself in need.

The bigger question boils down to how advisable and sustainable such a policy would be. What social net benefit would arise? I think we have every reason to be dubious.

One major question that needs to be asked is how to go about determining when and how we take the life lines away from organizations in order to see which ones fail and which survive.


For the time being, traders of equities appear to be immune to what is occurring to crude oil. That's not necessarily a bad sign, but we need to keep in mind that risk assets are on borrowed time: there are only so many mulligans where oil gets to slip by 27% in a day while animal spirits soar.

Granted, the conditions in oil storage are highly unique, and so the life blood of the economy may be a particularly bad harbinger these days as to how the broader situation on the ground is. But now even the Dec '20 CL futures contract trades below $30 ($27.21 as I write this).

We never really do get the counterfactual: what would have happened? Populations, cultures, demographics, etc., may all play their role as to how the virus is able to spread and potentially kill.

My suspicion is that, ready or not, Phase II is soon coming. People are just not going to put up with being on high alert for months at a time.

It's tempting to look at how one country or another is handling the crisis, and potentially useful; I have specifically mentioned Sweden in the past. That said, we can only infer so much from the results, as every situation is unique.

Term Structure

Near-dated VX futures have definitely taken the bruising between Friday close and Monday morning.

For the first time in awhile, spot VIX sits below the two front months, more or less directly on par with the M3.

Realized measures on the S&P 500 are of course dropping as well. I am quite interested to see if the course changes as more earnings reports flood in, but a classic vol crush is undeniably underway, and anyone who has observed and traded these markets for the last several years knows that vol can fall quite steeply.

Record spot VIX readings over the last couple months, but now we're at lows last seen in early March.

Agree or disagree, equity is trying to stuff the uncertainty and move forward toward a stock market recovery... hopefully supported by an economic rebound.

My question to readers (I have my own figure in mind, which I will share in the subsequent piece): where's the bottom for spot VIX over the next month? Of course, any number could mark the theoretical bottom. But under positive circumstances, how low do you see this metric going? I'm very curious as to your views.

Wrap Up

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This article was written by

The Balance of Trade profile picture
Adam Zingg, CFA offers both practical and theoretical perspectives that will benefit readers who wish to learn more about how to execute  on views or strategies that interest them.  Whatever your overarching philosophy or expertise, I believe there is value in understanding how trading works. This is perhaps especially true for investors, who often take a more philosophical, less mechanical view when it comes to their processes. It is not my goal to:1) convince you which side of the market to be on2) establish your trading time frames3) have you directly follow any specific trade ideasInstead, I aim to demonstrate how complicated sounding ideas can be simplified and accessible.  My hope is to grow your tool kit of resources, and give you healthy confidence to execute your own personalized strategy.  Trading and investment are fascinating, applicable across a wide variety of fields and disciplines.  Greater focus on targeting, execution, and exit strategies build transferable life skills.  In reading my work, it is my goal that you will consistently glean useful insights and build skills that enhance your ability to trade and make important decisions.

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.

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