VIX Is Weird

Includes: VXX
by: Wall Street Sector Selector

By John Nyaradi

Stocks drop, Euro drops, why did the VIX drop?

Bad news from abroad and a solid decline for U.S. indices made no difference to the VIX index yesterday, which registered a 7.33% decline. VIX ETFs fared a little better, as the VXX ETF registered a 2.32% decline. We all know that the VIX index is typically a measure of “fear” in the marketplace and so it can only be considered peculiar on a day like yesterday when VIX declines in synch with equities. So why did VIX decline along with stocks with no encouraging words or actions from the ECB or Fed this week regarding fiscal stimulus?

Either major indices are wrong or the VIX is wrong, and I would like to know which one it is.

To further illustrate the dark storm clouds again: Europe is the crisis that just won’t quit. After ECB President Mario Draghi’s speech last week in which he “promised” to save the “integrity of the euro,” I believe that investors were expecting some form of action today from the ECB’s meeting in terms of “saving the world” or, more accurately, stimulus and bond buying programs to prevent Europe from burning to the ground.

In an eerie kind of way, it reminds us of the Fed’s continued, lackadaisical approach to our own stimulus here at home, in which Dr. Bernanke and his team continue to string investors along the fine line of “we are ready to do something, but we will not do anything yet” approach to our shriveling economic recovery.

By all accounts, the VIX should be shooting through the roof, as our policymakers continue to string us along while huge storm clouds gather. Just think election year politics, fiscal cliffs, an imploding Europe, and idle monetary policymakers. Again, which one is it: are markets right or is the VIX right? Something will have to give soon and, one way or the other, these divergences will be resolved.

My guess is that the VIX index will likely take a huge surge if this thing gets any more messy and fear subsequently engulfs the marketplace. A 4o reading on VIX is not out of the question and the only question today is why does complacency run so rampant? Perhaps it’s as simple as we have all been trained to expect central banks of the world to ride in and save the day.

Bottom Line: Why on earth is VIX on the floor when most major markets seem to be heading for the brink of collapse? Maybe everyone has nerves of steel or maybe markets don’t see that they should be more scared than VIX currently indicates they are. Or, perhaps, VIX is right and there will be clear sailing ahead. Whatever the answer is, we are sure to find out soon.

Disclaimer: Wall Street Sector Selector trades a wide variety of ETFs and positions can change at anytime.