Should We Be More Worried?

A look at VIX futures suggests Wall Street isn't too concerned about the January sell-off

by Adam Warner

Published on Jan 19, 2016 at 9:57 AM
Updated on Jun 24, 2020 at 10:16 AM

Well, we've officially devolved into The Worst January Ever for the markets. Now, can someone please tell the CBOE Volatility Index (VIX)? 

Yes, I know all of a week ago, I wrote that VIX was at one of its most overbought stages vs. its 10-day simple moving average. That's just not the case anymore, and that's on the heels of an extremely volatile and ugly week. 

Ten-day realized volatility lagged a bit when we last checked in; was in the 15s one week ago. But as I noted, it misled a tad, as end-of-2015 slow days still made the cut. Well, take those out and put last week's roller-coaster ride in, and we now see 10-day historical volatility check in at about 23. It's the highest reading for that number since the August-September market swoon, although it blipped close in December.

VIX did rally, but given the backdrop, a close of 27.02 hardly seems extreme, considering we saw as much as a 60-handle drop on Friday -- and it's an awful lot more likely that traders worried more about a weekend debacle then paying a few extra pennies of time decay thanks to the long weekend. 

But that's a subjective opinion. Objectively it's now 15% above the 10-day. That's historically high, but in this backdrop sure suggests an orderly sell-off and nothing close to panic. I mean, we got 120% above the 10-day in August, for example. And it's barely above CBOE 3-Month Volatility Index (VXV), which closed at 26.88, though I suppose another way to look at that is the market is pricing in some permanence to the volatility lift. 

Except the market's really not pricing in permanence just yet, if you look at VIX futures: 

160119Warner1

Chart courtesy of VIXcentral.com


Remember, VXV prices in volatility between now and April. An April future prices VIX going forward from April expiration. And that's saying by then we'll have settled down. In fact, it's saying we'll have settled down even sooner, more like February.

I'm not saying any of these prices are right or wrong, just that generally speaking, the market is acting as volatility is going to drift lower soon, not keep accelerating. That, of course, makes sense in that you rarely go broke anticipating mean reversion.

But in this backdrop? It just feels like we remain under-worried. It's sort of cliché that we need a flush-out. Maybe we don't; I’m sure it sometimes bottoms on medium emotion. I just don't feel like that's a high-probability play, though. I'd really like to see some more signs of panic.

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

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