Stocks quoted in this article:
It's been a long time since we were able to say the CBOE Volatility Index (VIX) needs a rally just to get to 11. It was Feb. 23, 2007. The VIX closed at 10.58, slightly up on the day. It was a Friday. It would lift a little on Monday, Feb. 26. It closed at 11.15, even though the S&P 500 Index (SPX) was down slightly. Hey, "Monday Effect," anyone?
On Feb. 27, 2007, the market got plowed, and the VIX rallied 64%. I believe that was the one-day record VIX lift in percentage terms, and is still the record.
The market would recover and actually make new highs later in 2007, before getting slammed big time in 2008.
I bring all this up because on Friday, VIX closed under 11 for the first time in seven and one-quarter years.
As we noted a few weeks ago, there's nothing terribly significant about busting through absolute numbers. And there's especially nothing particularly tradable when those absolute numbers are violated on the downside. The market actually tended to outperform three months out after VIX busted below 12. That's not to say VIX going lower is bullish. Rather, it says that low VIX is a byproduct of a strong market, and long-term trends tend to stay in motion.
But enough about the here and now. What do the markets see for Future VIX?
Here's the current term structure, courtesy of VIX Central:
The absolute numbers are lower, but the sentiment song remains the same. The "spot" VIX is always treated as the anomaly to the downside. The market "knows" that the VIX will mean revert and rally in the future.
Except it rarely does.
Look, the lower VIX gets, the more sensible it becomes to bet on a future VIX going higher. It's just that so long as the VIX is under 20 or so, the bet effectively never changes if you view it as a premium to VIX itself.
Here's Friday's term structure versus the term structure back on Dec. 24 of last year. The VIX then was at yearly lows, but at 12.50, so higher than now.
The slope is almost exactly the same, and the actual premiums to spot VIX are similar, too.
In other words, six months of a churning market and a drifting VIX haven't changed future VIX sentiment one iota -- it's still going to lift "tomorrow." Same as it ever was.
Again, VIX itself is at more than seven-year lows, so it's tough to argue with the urge to pay a premium for VIX futures. It's just that this is far from the only time the market has felt this way … it always feels this way. So, why should this time turn out any differently? The answer is it will turn out differently someday, there's just no reason this is THE time.
Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.