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The CBOE Volatility Index (VIX) is hitting new annual lows. It must be the imminent long weekend right?
Well, partly right.
As you may (or may not) recall, the VIX has some statistical biases as it pertains to day of the week. On average, Fridays are modestly weaker than other days, as traders/investors lower bids in actual options to offset weekend decay. Fridays that precede long weekends can be even weaker than regular Fridays. Occasionally, traders/investors fear weekend news more than weekend decay, but that's certainly not the dynamic at play right now.
Since holidays are not surprises, the marketplace tends to pre-anticipate the long weekend a couple of days early. Not only do we get an extra day of no market action, but we tend to get some slow and non-volatile sessions leading into the break.
Hence, it's not at all that surprising to see the VIX hit local lows ahead of Memorial Day. Perhaps that future volatility spike we mentioned yesterday will still happen, it's just not at all likely to start today … or Tuesday, for that matter.
But, it's misleading to blame the entirety of the VIX lows on a calendar quirk.
VIX futures, and the iPath S&P 500 VIX Short-Term Futures ETN (VXX) do not have these calendar quirks. And they're each drifting as well. Here's the VIX term structure yesterday versus how it looked all of one week prior. Chart courtesy of VIX Central.
Those dips aren't enormous, maybe 0.5 to 1.0 across the board. But remember, this is just one week. The VIX itself was down a little over 1 point -- so, if anything, futures are doing even worse than the VIX itself, on a relative basis. In other words, it's not the holiday smacking volatility down, it's a good old fashioned reduction in Fear.
Before it gets you all bearish, keep in mind that complacency is a lousy market-timing tool. We can stay apathetic almost forever. And the futures always overprice the probability of a lasting VIX lift. As long as the curve slopes up and the futures are a decent premium to VIX itself, there's still anticipation of a "someday" VIX lift built into the system. That anticipation continues to decline over the course of time, but it's still out there.
Anyways, enjoy the break. See you on Tuesday!
Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.