Stocks quoted in this article:
So, in the past couple of weeks, we've noted many signs of fear spiking.
We have the CBOE SKEW Index (SKEW) hitting 16-year highs. Volatility in currencies has spiked. The CNN Fear and Greed Index tilts way toward fear. The Russell 2000 Index (RUT) has hit multi-year lows vs. the S&P 500 Index (SPX). The iPath S&P 500 VIX Short-Term Futures ETN (VXX) and the CBOE Volatility Index (VIX) are acting relatively well -- and on and on.
But, there's one spot that hasn't gotten extreme in all this. And that is, oddly enough, the VIX itself.
Sure, VIX has crept up lately. In fact, it has more than crept -- it's rallied about 35% since the middle of last week (click chart to enlarge).
It really hasn't broken out, though. It's riding along the widening upper Bollinger Band, but it's stopping short of stretching too far from its 10-day moving average. We haven't quite met the "20% above the 10-day" threshold that I use as the "official" marker for overbought. You could really make the case that we deserve overbought by now.
Meanwhile, 10-day historical volatility in SPX has continued to pick up. It's now about 13, which is far from enormous, but a nice steady lift of readings below 4 at the beginning of September.
And, the volatility is picking up steam. This, via Dan Nathan:
So, in a way, VIX isn't quite keeping up. It averages about a 4-point premium to realized volatility -- now it's more like 2-to-3. Granted, that "premium" tends to contract when realized volatility actually does lift. VIX does tend to expect mean-reversion. It's just that the "mean" sure feels like it will stay a bit elevated for now. I'm on the fence directionally, but I do believe volatility will hang in as the calendar flips to October.
I want to make clear that I'm only referring to VIX itself. The VIX futures term structure still slopes upward, as it always does. So, while I believe it makes sense to price options as if the market will remain somewhat volatile in the next few weeks, I don't really see the need to pay for VIX futures that expire half a year from now. Someday that will work, but no reason to think the current hypothetical VIX spike is the one.
Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.