What VIX Is Telling Us About 2016

What VIX and VXX are telling us about the market's mental state as we head into 2016

Adam Warner
Jan 4, 2016 at 8:39 AM
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Happy 2016! I guess flattish is better than down, but here's to hoping we get a better stock market in 2016. But before we turn the page, let's take a final look at 2015.

The SPDR S&P 500 ETF Trust (SPY) rallied a little, sold off somewhat violently, made back the losses, and then basically went into the four-minute offense in an attempt to close green on the year. It didn't quite work, as it closed down 0.87% -- although if you factor in dividends, it showed small gains.

The CBOE Volatility Index (VIX) closed the year down 5.16%, but that's a shade misleading, thanks to the random endpoints. The median VIX was 15.29, up from a median VIX of 13.67 in 2014.

The relationship between VIX and SPY was as close as ever, albeit in a negative way. The correlation of VIX day-to-day changes to SPY moves was negative 0.87, and the best fit multiplier was negative 7.99 (meaning if I told you the SPY move, multiply it by negative 7.99 to get the VIX move). Both of these measures were historically high, suggesting VIX was quite responsive to every little SPY tweak.

The iPath S&P 500 VIX Short-Term Futures ETN (VXX) put in its usual stellar performance. And by "stellar," I of course mean "atrocious." It pared a mere 36.21% of its "value" in 2015. It had its moments, though. If you woke up on Aug. 17 and decided volatility was about to explode, and then sold out two weeks later, you would have made 95%. In two weeks!

And that's actually why, mentally, it's a very tough short -- even though it ALWAYS works over the course of time. You have to have a mindset to withstand some scary rallies in your face.

VXX proxies a rolling 30-day VIX future, and thus is a good proxy for actually maintaining a constant duration futures short. The "theoretical" vol futures trade actually did much better in 2015. Here's the term structure as it closed on Thursday vs. the close of 2014. The whole board was up about half a volatility point, and that's with VIX actually lower now than at the end of 2014.

VIX futures 0104
Chart courtesy of VIXCentral.com

Throw it all together, and it suggests we're at a higher fear state now than we were entering 2015. If you consider that a contra tell, it's a bullish sign on the margins heading into the new year.

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


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