CHART OF THE DAY: A SURE BET
There is, arguably, no more important gauge of investor sentiment than the VIX. Market extremes are generally best seen by the extraordinary swings in the VIX. As we’ve recently described, the market has been on a drunken walk that takes it in one direction for a series of weeks and then suddenly reverses with the utmost conviction. This back and forth has been a hallmark trait of the range-bound market of the last few months.
With today’s invincible feeling in the equity markets the VIX has now fallen a remarkable 14 of the last 15 days. That’s a 93% win rate in a three week period. Not bad if you’ve been trading or hedging via the VIX. Unfortunately, this trend is more than unsustainable. This is the longest losing streak for the VIX since the March 2009 rally began and the few losing streaks that came even close were followed by sideways to down markets in the following 4-8 weeks.
The VIX has become a sure bet. As the old saying goes, if something seems too good to be true it probably is. The trend is your friend until it ends and this trend is beginning to look like a mighty bad bet to me. I’m not one to call tops, but as a manager of risk this indicator has me feeling a bit uneasy.
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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11 Comments
they say never short a dull market…but i think a volatility hedge is a great call here, mr. tpc
Not meant to imply that the VIX is a sure bet to the upside, but in reading this over again I can see how one might think so. Rather, it should say that VIX has become a sure bet to the downside….and that has me feeling uneasy. i.e., some near-term hedging is likely wise.
well, vxx has lost 25% in the last 3 weeks, and that looks oversold to me; as you might have gathered, i am long equities, short some treasuries and currency, but i have been looking for a better hedge for my equities, and i think vxx makes sense here and now, as a hedge; btw, i will be quite happy if i lose money on vxx given my equity portfolio…
Sounds like a wise move to me. I have had very little upside exposure during the recent move higher which is frustrating considering I said it would be a buying opportunity….
I am getting hugely bearish on a one-month basis. Euphoria is back, meanwhile half the macro indicators have rolled over, stimulus is about to end, and one or more European countries (not just Greece) could slip from dire to true crisis. The big issue is: What could trigger a market fall? When we get days like Thursday, with a 170bps rally off the low back to flat for the day on HORRIBLE news, or yesterday, with a huge small-cap rally on essentially no news, I can’t see anything on the horizon that could phase the bulls.
It’s still difficult for me to imagine a substantial new bear market trend when the earnings cycle is so favorable. I think we will be choppy until H2 when the estimates are far too high. Then the bear could sink its teeth in again….
It looks like a short is again worthwile at these levels for a quick downmove. It seems you can trade this market selling sht term overbought divergences and buying when it’s sht term oversold.
TPC,
can you send me an email next time you plan on tanking the market with one of your well reasoned articles? A little heads up would be nice.
how about hedging with mar 19 vix calls? selling for about 1.55 right now. breakeven of 20.55 vix seems reasonable.
VIX gap reversal #2 for 2010 – also of note, the Jan 12 top was marked by a VIX open gap down at relative low levels and reversal back up. The a:d ratio thrust which led to the multi-day climb into Jan 12 was 10 days before the start of the Jan – Feb correction. The last a:d thrust day of note (> 4:1) was 10 trading days ago.
One day reversal, or will news flow create something deeper? Dunno, but the gap open VIX reversal this morning had me selling into strength, although I did buy on close some commodity plays on the thesis that the USD looks due for a pull back too, perhaps sparked by a surprise rally in Sterling and euro’s inability to push lower and hold lower of late. Long dollar trades I started way back in December now seem awfully crowded.
The VXX is not the spot VIX. Its a portfolio os near term futures which are considerably higher on ‘expectation’ of rising volatility. The longer that expectation remains unfulfilled the longer it will underperform
The VXX has been underperforming other shorts, like SDS say, overtime mostly due to the fact that it is continuously rolling into these much more expensive VIX futures.
If you look at the second vix future (currently April) its trading 20% higher than where the VIX closed last night.
In effect, the VXX is already “paying up” for the VIX to settle at much higher levels. Its a very expensive premium/decay to be continuously paying in a market that has been really going nowhere.