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So far, 2014 has turned into a rather awful year for making fun of iPath S&P 500 VIX Short-Term Futures ETN (VXX), our old punching bag.
VXX listed in late January 2009 for the express purpose of fooling people into thinking they could buy CBOE Volatility Index (VIX) in exchange-traded note (ETN) form … I mean, allowing people without futures accounts to "own" a volatility ETN.
Of course, as everyone soon discovered, VXX was a disaster to hold for any length of time, due to its structure. It proxies a 30-day VIX future, but in order to keep duration constant, it must roll out in time via VIX futures or swaps. And if the near-term VIX futures curve is in contango (upward-sloping -- it costs money to go out in time), VXX has a headwind and will drift over time.
In 1,293 days of trading, VXX has hit a new all-time low 284 times, nearly 22% of trading days, or roughly once per week.
But alas, the pace of new all-time lows has slowed to a trickle. It's only happened four times in the 56 trading days so far in 2014. And it's not particularly close to happening anytime soon. VXX hit its last all-time low of $39.85 on Jan. 22, 42 trading days ago.
Believe it or not, this is now the fifth-longest run of non-records in VXX in its illustrious five-plus-year history. Here's how this current move stacks up versus the top four streaks, as well as streak #6 that we just passed:
"SPY Trough" shows how far the SPDR S&P 500 ETF (SPY) dropped from the date the streak started to the worst close during the streak. "% Change SPY" shows what SPY did over the whole round trip. The current move uses the close of March 21.
Long story short, it's yet more evidence of an uptick in fear ahead of anything much actually happening in the market. The trough in all the other moves usually occurred within a few weeks of the last VXX low. We don't know yet whether we've seen the trough in this move, but if we have, it will prove way shallower than any other. And the market is still slightly higher than it was back on Jan. 22. The only other time SPY had recovered all its losses by the end of the streak was in early 2012, and that was a 177-day streak that saw a very sizable drop (and huge VXX pop, I would add) in the middle.
So, is the VXX and VIX futures complex "smart" and predictive of future ugliness, or is it tilting at windmills that just aren't there? We won't know the answer without the benefit of hindsight, though I suspect that the persistent strength in fear is ultimately bullish on the margins.
Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.