A Wild Cliff Ride for the VIX…

Here’s a decent gauge of the wild sentiment ride the fiscal cliff sent the markets on in recent weeks….

  • In the days leading up to the fiscal cliff the VIX started to rally as worries over a deal materialized.
  • On the 28th as it looked like we were “going over the cliff” traders were positioning for downside as the VIX surged to 23 from 15 just a few weeks earlier.
  • Then the collapse. ┬áThe VIX plummets back to earth as the markets realize that the fiscal cliff was essentially much ado about nothing….
Never a dull moment in the markets….

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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Comments

  1. Do wall street Traders really put any weight into the VIX with any seriousness to how they allocate their portfolios?

    I have often thought of the VIX as a sort of lagging indicator so I have never really gave it much thought.
    Just curious if there are people who really use it for investment decisions or is it simply a party favor for wall street?

    • I look at the VIX on occasion, but I can’t say that I use it to gauge anything too crazy. I happened to discuss it briefly last week in my research because it looked like a sign of excessive fear, but that’s unusual for me. I really don’t pay too much attention to it.

  2. No surprise there was a deal, and no surprise it was in the last minute. No side seems to want to be seen giving up easily. However, were not the deal worse than expected. 1,3 percent off GDP assuming a multiplier of 1. That could send the US to at least a mild recession.

    Seems to me that if the politicians do something they say is good for the economy, all the actors buy risky asstets. You have to do that even if you do not believe it will be a solution, because of career risk. Everbody else going to buy, so you have to do it yourself as well.

  3. This actually makes perfect sense.

    Most “investors” won’t sell their longs. But there was so much at risk they were willing to hedge their positions. So the strategy must be buying a lot of puts. Not to bet the market down, but to protect their profits. This drove up VIX.

    When the deal was passed, your hedges lost most of its values. But that is insurance and is the price you pay. It cuts into your total return. But it allows you to sleep at night.