The spike in volatility last week was met with selling by ETF investors, with the iPath VIX ETN (NYSEARCA:VXX) seeing an outflow of $69M on Friday.
The ProShares Ultra Short-Term Futures ETF (NYSEARCA:UVXY) saw a weekly outflow of $237M, or 59% of its market cap, as traders cashed in on a 45% five-day move higher. Meanwhile, that fund's opposite - the ProShares Short-VIX ETF (NYSEARCA:SVXY) - took in nearly $300M of new cash.
Sabre-rattling between the U.S. and North Korea has caused the most minor of shakes in the previously one-direction stock market, and it's got the left-for-dead VIX rising above 15 for the first time since May 18, according to Bloomberg.
Alongside record lows in volatility, the number of short positions in VIX futures just hit a new record, according to Bloomberg. What's more, an ETF which benefits when volatility falls just saw its largest weekly inflow since June.
All this comes as we move into August, where historical data show volatility tends to jump more than any other month.
Bottom line, says Leo Chen at Cumberland Advisors: When popular measures (such as the VIX) are easily available to all, they cease having any predictive value.
So by all means, follow the VIX as an excellent contemporaneous indicator of what's happening in the market. But selling (stocks) when VIX is low (as it is now), or buying when it's high, isn't going to yield any abnormal returns.
Asia may be most interesting. Realized volatility - a measure of how much share prices move around - has dipped to 8.2%, about the lowest since at least 2000. At that level, it means the market has moved by about 0.5% per day on average over a given time frame.
Since Jan. 2016, the Asia index has dropped more than 3% just once. In previous bull markets, there were 3% daily declines on average every two-three months.
According to a paper from two University of Texas researchers, a quirk leaves the volatility market vulnerable to a sophisticated trade involving pushing around the prices of underlying S&P 500 options in order to manipulate the value of VIX derivatives as they settle.
"This market is fairly unique because you’ve got a very liquid market that’s settling based on the price of a less liquid options market,” says one of the authors.
A hypothetical example: A trader long $2M of VIX futures, wanting to push prices higher prior to settlement, could spend $1M overpaying for S&P 500 options at the settlement auction, driving up the price of the contracts used to calculate the VIX. Any money lost on the S&P options trade would be gained doubly by the VIX derivatives (where twice as much are owned).
The CBOE says the work is based on "fundamental misunderstandings."
The CBOE Volatility Index fell to a 24-year low of 9.70 with a 8% move down. Today's downward swing in the fear gauge is likely tied to the result of the French election and the general sideways action in global markets.
Will the VIX revert back to its historic mean of 20? Convergex chief market strategist Nicolas Colas weighs in.
"Volatility is ultimately the mathematical measurement of human emotion on stock prices. Emotions are by their nature unpredictable, which makes the VIX equally inscrutable. All we know is that human emotions still exist, and therefore volatility will return," says Colas.
Particularly interesting with the CBOE Volatility Index at more than a two-year low, but the cost of out-of-the-money S&P 500 index options has jumped to levels not seen since last summer's Brexit vote.
The so-called CBOE SKEW Index is up 8.3% YTD. Excellent chart from Bloomberg is here.