Stocks quoted in this article:
Quite the rally in the CBOE Volatility Index (VIX) last week, up 17%!
Panic in the streets amidst fears of … I don't know. We cared about some Portuguese bank for a few minutes; I guess we'll blame that.
But alas, we never quite saw a truly overbought VIX. It peaked at about 10% above its 10-day simple moving average, and never scaled any major Bollinger Band or anything of that sort.
It does feel like we're "due" for a random fear cycle, but you'll go broke trying to time one, so best to let it actually happen first. I'd say there are two minor lessons to refresh here:
- The calendar still does matter. VIX often troughs in the period between June expiration and July 4. It happened to bottom on the actual day before the long weekend this year, but it's more about the general time frame. It's just a dead news stretch ahead of either a long weekend or a broken up week (July 4 on a Wednesday, for example). followed by the start of earnings season.
- It's usually best to look at VIX through the absolute-move lens, as opposed to the percentage-move lens. Saying VIX moved 17% in a week sounds impressive. Saying VIX moved 2.27 points in a week sounds kind of eh. Yet both statements are true, so it's all in the marketing.
The reality is VIX was understating real volatility estimates ahead of the holiday, and now we're probably a bit more accurate.
Real volatility expectations did lift a tad this week though. The iPath S&P 500 VIX Short-Term Futures ETN (VXX) is close to the Worst Product Ever over time, but in short stretches, it's nice to have it around to help separate the calendar noise from what traders really think about future volatility. And VXX made it an entire week without hitting all-time lows! It actually lifted $1.13, or 4.1%! So yes, there was a modest uptick in volatility assumptions going forward.
Of course, whatever panic actually set in was concentrated in small-caps, so VIX and friends really just had a bit of an echo. The iShares Russell 2000 Index (ETF) (IWM) dropped 3.9%, vs. 0.8% in the SPDR S&P 500 ETF Trust (SPY). The CBOE Russell 2000 Volatility Index (RVX) lifted $3.12, or 19.5%. Again, we did actually see Fear creep in, but it's far, far, far from anything particularly noteworthy just yet.
I'm on the sidelines here. I'd love to sell VXX into real strength, and it really does feel like a volatility hiccup is percolating. But for now, maybe time to just watch and wait.
Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.