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Do I hear single digits in the CBOE Volatility Index (VIX)?
We got pretty close on Thursday. The VIX ended the holiday-shortened session at 10.32, the lowest closing print since Dec. 20, 2006. One more up day in the markets and we get there, right?
Well, probably not. It was mostly thanks to the pre-holiday weekend quirk that we often see in volatility indices. Russell Rhoads, CFA, highlights the point here in his piece on the CBOE Short-Term Volatility Index (VXST):
VXST closed at an all-time low on Thursday based on a strong equity market and a three and a half day weekend. The weekend effect for volatility indexes relates to the indexes being calculated using calendar days. In the case of VXST the measurement is nine calendar days. When there is a three day weekend there is more of a headwind for VXST and the result is usually VXST losing value the day before the holiday weekend.
Clearly it impacts VXST more than anything else, as there's one slow half-day followed by 3.5 days of inaction in a statistic that only looks out nine days total. But VIX sees the same dynamic, just in smaller scale. But alas, there's a bright side (if you want to see your favorite volatility index do better soon).
The very consistent part of this mini-story is that VXST has always risen the day after a long weekend.
So we have that going for us, which is nice.
The iPath S&P 500 VIX Short-Term Futures ETN (VXX) also closed at an all-time low on Thursday. In fact, it hit all-time lows every day last week. Of course, that's not all noteworthy. I still score at home, and for the record, that makes 311 all-time lows in the 1,366 trading-day history of VXX. In the words of … 311 … it's a "beautiful disaster."
The big question, of course, is whether any of this means much of anything as far as this rally ever ending. We (and others) ran numbers when VIX first broke 12 to see if excess complacency signaled a market turn. And it really didn't at all. If anything, the market did better off of "cheap" VIX than it did off "normal" VIX. That wasn't to say cheap VIX was predictive; rather it was reactive to the overall solid trend, and trends are slow to change.
Obviously the lower VIX gets, the closer we are to the end of the rally. But again, that's a lousy timing mechanism. I can also always say we're closer to the end of the rally "today" than we were "yesterday" -- but it's gibberish.
I do expect VIX to rally, though. But again, as above, that's more a function of the calendar than anything else. The holiday is now behind us, and earnings are ahead of us. The market may keep lifting, but VIX probably will lift too going forward, at least modestly.
Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.