Is the VIX Signaling Doom? Should we be worried?

Dissecting the 'disparity' between the CBOE Volatility Index (VIX) and other asset classes

by Adam Warner

Published on May 28, 2015 at 9:18 AM
Updated on Jun 24, 2020 at 10:16 AM

Remember all the way back to … last week? You know, that time when spring was in the air and the CBOE Volatility Index (VIX) was in the 12s?

We were so carefree and complacent back then. But turns out maybe we should have been a bit more concerned? This, from Barron's:

"Rebecca Cheong, head of Americas equity derivatives strategy at UBS says on Friday that the VIX is unusually low compared with similar readings of expected price swings in European stocks, 10-year Treasury notes, the euro currency, oil and gold.

"Cheong says that the VIX doesn't tend to stay low versus all assets for long, which means that she expects the U.S. stock market to roll over in the month ahead. Since 2013, she finds that a VIX reading under 12 at the same time that the VIX is subdued relative to other assets 'implies investors were under-hedged when global risks rose,' and that the S&P 500 'lost as much as 5% in the following month.' When this happened in August 2013 and December 2014, the S&P 500 was lower both times."

Should we worry? Well, we're talking a sample size of two here, so that immediately gets me thinking that I can't prove or disprove anything. Do FIFA indictments cause big market rallies? They did yesterday, so there must be a connection!

I'm not even sure this VIX "rule" even worked those two times. Here's VIX vs. 10-year Treasury vol (VXTYN) going back to 2013.

150528Warner1

We did see a big vol disparity in 2013, and again in late 2014. In gold (GVX)?

150528Warner2

In 2013 -- yes. In late 2014, though? Not so much. And then there's oil (OVX).

150528Warner3

There's nothing in 2013, but we did see a disparity in late 2013. But that disparity got larger and larger, and really the biggest disparity actually "predicted" a stock rally. And finally, there's volatility in the euro (EVX).

150528Warner4

It's kind of similar to oil vol: nothing until late last year, and actually more "predictive" of a stock rally than anything else.

So, we really have a volatility lift in Treasuries and gold in 2013; not confirmed so much in oil vol, euro vol, or the VIX. And in 2013 into 2014, we had a relative vol lift in oil that has now dissipated. We're left now with relatively high Treasury and euro vol.

I really just don't see the case where this will lead us into any sort of doom. My best read is that volatility sloshes around a bit between asset classes. Perhaps we're due for a lift in stock volatility. It's now almost five months since the last noteworthy spike, so it's a reasonable call anyway. I just don't see the case that there's anything abnormal about spots of volatility around the investing sphere or that said volatility has enormous predictive value.

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


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