Why Isn't the VIX Higher?

Analyzing the currently bizarre dynamic of the VIX

by Adam Warner

Published on Jul 27, 2015 at 9:39 AM

Speaking of Fear …

What he said. OK, seriously, I'm not a big fan of making observational judgements based on the absolute value of CBOE Volatility Index (VIX) and where I think it "should" print. But right here, right now? Yeah, why isn't VIX higher?

1. Ugly market?

Check (sort of). We dropped 1%-ish on Friday, taking all the way back to levels not seen since … about two weeks ago. So let's call it ugly, but not catastrophic. 

2. Cheap vs. realized volatility? 

Not really true. Ten-day realized volatility in S&P 500 Index (SPX) is about 10 right now. When VIX is in this range (which seems like always), we typically see about a 4-point premium of implied over realized. That's close to what we see now. VIX is only slightly low by this metric, and given it's inexact, we can call it a rounding error. 

3. Cheap vs. expected news flow? 

This seems accurate. Bad news out of China? Check. Not only today's sell-off, but this, from MarketWatch:

"Taylor Swift is the latest to take on counterfeiting in China.

As the American pop star's popularity in China has exploded, so has a huge market of unauthorized Taylor Swift products, with e-commerce peddlers selling everything from fake perfume to pirated autographed guitars." 

Maybe we can get past that one, but perhaps more importantly, this, from CNBC:

"'I think the market's very much concerned about the commodity (decline),' said John Lonski, chief economist at Moody's. 'The contraction in China manufacturing activity is gaining momentum and the credit market has yet to signal that rates are not about to go higher.'"

Plunging oil prices, worries about China and rate hikes? Sounds like a greatest hits of "Scary Market News '14-'15." At least Greece is finally behind us, per Yahoo! Finance: 

"Talks between Greece and its international creditors over a new bailout package will be delayed by a couple of days because of organizational issues, a finance ministry official said on Saturday." 

OK, guess that's not done yet either. All in all, it's kind of bizarre dynamic. We're simultaneously obsessed enough with the same few recurring global stories that the market can't go higher, yet not so concerned with them that we bid options prices up all that much. 

We really need to break out of our 2015 range. I was hoping for an upside blast, but maybe we really do need some sort of shakeout before we can rally for real. 

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


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