Schaeffer's Trading Floor Blog

A New VXX Low, and the Fear/Volatility Paradox

Investor fear has lifted, despite a drop in volatility

by 5/4/2014 7:34 PM
Stocks quoted in this article:

Our long national iPath S&P 500 VIX Short-Term Futures ETN (VXX) nightmare has finally ended! At about 9:40 a.m. ET Friday, VXX hit its first all-time low since Jan 22. That was a streak of 71 trading days, good for the third-longest streak in the illustrious five-and-a-quarter- year history of VXX.

If you put that extended VXX un-performance in the context of a market that has gone nowhere, it's probably the best stretch VXX has ever had.

Let me do some 'splainin.'

Here's the now-complete chart of extended VXX runs between all-time lows. Included is the duration of the VXX "boom," the biggest drawdown in the SPDR S&P 500 ETF Trust (SPY) over that period, and the net move in SPY from new VXX low to new VXX low.

VXX runs between all-time lows

At its worst, SPY only dipped 4.95%, making this officially the shallowest SPY drop associated with an extended VXX churn. What's more, SPY actually rallied a bit over the 71 days, closing 2.04% higher than it did on Jan. 22.

That's only the second time SPY rallied over one of these stretches, and the other case was quite the different animal. VXX went 177 trading days, and about eight-and-a-half calendar months between new lows in 2011-2012, experiencing a 17% drawdown in the middle, before ultimately emerging with a 3.75% gain. That's an awful lot of pain and a very long time frame.

Compare that to now. As we note just about every other day, all we are doing is churning. In theory, that's a terrible backdrop for VXX. In a flat market, we'd expect to see the CBOE Volatility Index (VIX) relatively tame. And since Jan. 22, VIX is almost literally unchanged. Yet fear of future VIX Lifts has actually gone up. Here's the VIX term structure on Jan. 22 versus Friday.

CBOE Volatility Index (VIX) Historical Prices, Jan. 22 and now
Chart courtesy of VIX Central

It's as if the market was perpetually worried about a Putin Ukraine Invasion. Or something. Fear has clearly lifted, despite the fact that the market sits just about at all-time highs and actual market volatility has gone lower.

If you're a contrarian, this is a bit bullish on the margins. If you believe VIX futures are smart money, then … well, you need to explain why the VIX futures curve always slopes like this, yet over time, those long-term futures rarely predict anything correctly.

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.

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