Schaeffer's Trading Floor Blog

Reading the VIX Tea Leaves for Signs of a Shift

Tracking the 'large amount of noise' in today's choppy trading environment

by 4/21/2014 7:30 AM
Stocks quoted in this article:

There's a theory out there that volatility picks up right before a market turn. Well, we're certainly getting that volatility pickup, especially in the Nasdaq as we noted last week.

The big question though is, which move are we about to reverse? Is it the longer-term bull move that's ending? We can say it goes back to 2012, 2011, or 2009 -- it depends on your definition. Or is it the shorter-term choppiness that's about to end? That, I would say, goes back to the turn of the year into 2014.

Something significant is clearly going on -- we haven't had intraday volatility like we saw last week in quite some time. We'll just have to wait a bit more to see which way we break, but it sure feels like it's about to happen.

SPDR S&P 500 ETF (SPY) looked scary early on, before recovering to put in a pretty strong shortened week. We lifted 2.7% in four days, just about reversing all the ugliness from the week before. I noted last week that the CBOE Volatility Index never got extreme … at least in my subjective view of how it "should" act in a market as ugly as the end of the week before. Well, apparently it got extreme enough. It dropped a cool 21.5%, back to right where it closed two weeks ago.

In a calmer market, VIX would have likely looked way worse last week as it is generally a slow trade into extended holiday weekends. That's especially true when it's also an expiration. At least that used to be true … the popularity of weekly options has diminished expiration effects on options. Or rather, it's diffused the effects.

In big-cap world, 2014 has barely even happened net-net. It's an incredibly large amount of noise for a gain of around 1%.

Meanwhile, our good friend iPath S&P 500 VIX Short-Term Futures ETN (VXX) continues to shine … or at least not get clocked. It's now up to 61 trading days without hitting all-time lows. Its the fourth-longest streak EVER! OK, "EVER" only goes back five years, but still…

And we're within striking distance of hitting third place all time. That would be a 67-day streak from March to June in 2012. It's meaningless, of course, as VXX is a path-driven derivative that proxies a hypothetical rolling future that seeks to divine the forward value of a statistic. But hey, it's fun. The key number is $39.85 … and we're one good market week away from getting there.

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

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