Inverse Volatility Traders Are Cashing Out

One of the notable constants in the stock market's post-election march to new highs has been the prolonged hibernation of the CBOE Volatility Index (VIX), with scores of seasoned volatility pros having prematurely called for an end to the "low VIX regime" over this period. But as the VIX stubbornly refuses, for now, to revert to anything resembling its historical mean, 2017 has continued to be a banner year for inverse volatility trackers, including the ProShares Short VIX Short-Term Futures ETF (SVXY).

On the charts, SVXY has more than doubled in value on a year-to-date basis, and set a new record high of $108.50 as recently as Friday. Simultaneously, SVXY's 14-day Relative Strength Index (RSI) ascended to an eight-month high north of 80, and its 30-day historical volatility arrived at 18.5% -- a slim figure that Trade-Alert places in the extremely low 1st percentile of its annual range.

The extremes don't stop there. In the latest reporting period, short interest on SVXY fell 19.3% to 1.95 million shares, representing the lowest accumulation of short interest in over two years. The last time short interest on SVXY fell this low was July 2015, and that trough was followed by a steady build in short-selling activity that culminated just over a year later, in August 2016, at a peak of 22.59 million shares sold short.

Though SVXY has cruised effortlessly to new highs of late, the ETF has done so on the back of trading volume that has declined precipitously off the roughly 136.6 million shares exchanged in one week back in mid-January 2016. Weekly SVXY share volume over the past two years has averaged 48.6 million, but it's now been four consecutive weeks since even half that many shares traded.

And etf.com data shows that investors have yanked out a considerable amount of capital lately. From Sept. 1 to date, SVXY has registered net outflows of $699.75 million, with only three days of net inflows recorded over this period. That amount equates to fully 73% of the $925.89 million in net inflows SVXY racked up in the calendar year to date through Aug. 31.

If we were discussing an equity with this backdrop -- trading at new record-high prices, a considerably "overextended" RSI, significantly decelerating share volume, recent outflows that can fairly be described as "a stampede for the exits," and a distinct shortage of additional "rally fuel" in the form of short interest -- we'd be waiting intently for any sign of technical weakness, in an attempt to capitalize on what would appear to be, from a contrarian standpoint, an imminent, inevitable, and likely painful smackdown on the charts. And in the case of SVXY, such a smackdown would obviously coincide with a major VIX spike.

But an inverse volatility ETF isn't exactly a garden-variety stock, and -- as we've seen throughout 2017 -- the VIX can stay much lower (and for much longer) than most of us would have predicted. In fact, consider the contrarian implications of this observation: SVXY is an asset that's hitting new record highs within the context of a well-established, low-volatility uptrend... and yet investors are racing each other to the exits.

Now, with weekly Commitments of Traders (CoT) data still showing large speculators in an unprecedented net short position on VIX futures, that's certainly not a suggestion to go long SVXY (and/or short VIX); the risk-reward proposition simply doesn't add up. But the flight from SVXY of late, even as the fund's ascent shows no signs of slowing, suggests that there may be enough fear and skepticism remaining to keep the VIX suppressed at pundit-defying levels for a while longer.