To Every Season, Churn, Churn, Churn

Sentiment surveys and VIX trends are giving mixed signals

by Adam Warner

Published on Jun 19, 2015 at 9:31 AM

On one hand, everybody and their local billionaire are taking cover for the next market crash. For today's piece of evidence, I bring you this, from Steven Sears: 

"Major investors are preparing for the stock market to collapse.

In the past 10 days, these investors have quietly amassed significant CBOE Volatility Index (ticker: VIX) call positions. The VIX, commonly referred to as the "fear gauge," spikes in times of volatility. Call options, therefore, increase in value when stock prices plummet. Think of the options as catastrophic insurance policies. These trades are captivating the options market.

With the VIX now just below 15, top positions over the past two weeks include July calls at 17, 22 and 23, and August 17 and 23 calls. In recent trading, an investor bought 100,000 calls in apparent anticipation VIX will spike above 26 before the end of July. A trade of that size is not a retail investor's move -- that's an institution or someone running a significant portfolio." 

On the other hand, thanks to yesterday's rally, we now have yet another week of churn in the S&P 500 Index (SPX). We're right where we were this time last week … and on May 26 … and on April 24 … not to mention Feb. 25. 

In that light, it makes sense that investors' most popular opinion is that they have no opinion. In fact, the number of self-identified "neutral" investors in the American Association of Individual Investors (AAII) sentiment survey just fell beneath 45% for the first time in 10 weeks. 

All of which leads to a burning question. If no one has an opinion, then who is out there buying all these CBOE Volatility Index (VIX) futures and VIX calls?

The answer is likely that we're considering two separate questions. Opinions are interesting, but at the end of the day, maybe they don't mean that much. The VIX Frenzy, however, shows how many are voting with their actual money. And they're "betting" that actual money on a market dip and a volatility rip. 

Now, it's important to note that in the larger scheme of things, the volatility market is very small. You can buy a lot of VIX calls for a relatively low amount of money. Tracking those bets does give us insight into the marketplace, and it's an apples-to-apples comparison in that we see what they're doing in VIX now vs. other points in time. But at the end of the day, it's not a gigantic dollar commitment. 

So where does that leave us? We can't fully trust sentiment numbers, because those don't necessarily reflect actual behavior, but we also can't fully trust numbers like this VIX data because they're just not large enough.

I guess we have to use some intuition. I'm with those that say the rally remains hated and distrusted, and expectations for future volatility outstrip any and every measure of actual volatility. I'm not real sure we keep rallying in spite of all that. I mean, we stop around here every time. But I do believe that in a day or three when we inevitably start obsessing over the next Greece news or potential Fed hike, it puts a natural floor in until we see bullishness tick up.

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


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