Where's the Panic When We Need It?

The CBOE Volatility Index (VIX) is drifting, even though the market backdrop is quite ugly

by Adam Warner

Published on Jan 13, 2016 at 7:25 AM

What if the market threw a sell-off and nobody cared? Or at least cared enough to panic about volatility?

I noted on Friday that the CBOE Volatility Index (VIX) had hit historically high levels vs. its 10-day simple moving average. Well, that was so Friday. The market has fluctuated a bit, but nudged higher over the past couple days and volatility has actually drifted.

And what to make of this CBOE VVIX Index (VVIX) he mentions? VVIX is the volatility of VIX options -- the VIX methodology applied to the VIX options board! In the August market melt, VVIX hit the monstrously high level of 212.22 vs. typical readings in the mid-90s. And now? It's about 107-108.

That's slightly elevated, but hardly noteworthy. VVIX isn't even as high as it was in mid-December, even though the market itself acts much worse. What's more, much of the VVIX lift is more statistical than an actual change in demand for upside VIX calls. That's because VIX options are positively skewed, so merely VIX itself moving up gives higher vol VIX options greater weight in the VVIX calculation.

And all this while internals have turned quite ugly. Here's the percentage of S&P 500 Index (SPX) names trading above their respective 200-day moving averages (MA):

160113Warner1              Chart courtesy of StockCharts.com

And above their 50-day MAs:

160113Warner2
   Chart courtesy of StockCharts.com     

Both are imploding, and just about at August swoon levels. What's more, they're approaching August 2011 levels of ugliness. Not good. This isn't a great turn, in my humble opinion. I like my sell-offs accompanied by extreme bearishness. I mean, there's this header on MarketWatch:

160113Warner3

But that's more anecdotal than an indicator of what someone's actually doing with their money. We shall see.

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


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