The volatility index is off to its worst year-to-date start on record in 2019
The following is a reprint of the market commentary from the March 2019 edition of The Option Advisor, published on February 22. For more information, or to subscribe to The Option Advisor -- featuring 10 new option trades each month -- visit our online store.
It was not quite a year ago in this space when we discussed a very unusual start to the year for the now-defunct iPath S&P 500 VIX Short-Term Futures ETN (VXX). The volatility tracker had racked up big back-to-back monthly gains in both January and February, breaking its seasonal trend of firmly negative returns during each of the first three months of the year.
Now that VXX has matured, its replacement vehicle -- the iPath Series B S&P 500 VIX Short-Term Futures ETN (VXXB) -- is having a somewhat more typical first quarter, in the sense that it's been declining rather than rising. But to observe that expectations for short-term equity volatility have declined on a year-over-year basis undersells the drop in this metric by a few orders of magnitude.
Through Wednesday, Feb. 20, in fact, the Cboe Volatility Index (VIX) was down 44.8% to log its worst year-to-date start on record, per Schaeffer's Quantitative Analyst Chris Prybal -- and the eight-week losing streak for the index (on pace to extend to nine, as of this writing) is the longest on record since December 1992. VIX's freefall has gathered steam throughout this month, after it ended January with a key moving average close beneath a psychologically significant chart level.
Namely, regular readers of Monday Morning Outlook know that our Senior V.P. of Research Todd Salamone was looking for VIX's 5-day moving average to close below 18.03 -- half the December closing high -- as "confirmation" of a continued trend lower in volatility. That signal played out on Jan. 31, when VIX's 5-day moving average checked in at 17.93. The very next trading day, on Feb. 1, VIX kicked off the new month by settling below its 200-day moving average (the red line on the accompanying chart) for the first time in 80 sessions -- ending its longest such streak above this trendline since May 2018.
And another major technical foothold for VIX gave way on Friday, Feb. 15, when it closed beneath the 15 level on a weekly basis. This area had marked peaks in the summer of 2018 before VIX finally exploded higher in October, and then switched roles to catch the lows throughout February 2019. The eventual weekly finish below 15 directly followed an unsuccessful intraday test of resistance at VIX's overhead 20-day moving average (in green on the chart below) in the session prior. This short-term trendline has kept a lid on a few VIX surges year-to-date; it was last surmounted on a daily closing basis on Jan. 3.
Of note, since VIX's 5-day moving average first closed below 18.03, the index hasn't moved any higher than 17.89 on an intraday basis (with that peak occurring on Feb. 7). And at the close on Feb. 21, this extremely short-term trendline notched its first daily close of 2019 below the 15 level, as well.
Following the May 2018 break of its long streak above its 200-day moving average -- which likewise came on the heels of a fairly substantial VIX explosion -- note that the index traded for many months in a generally choppy, sideways fashion before making another major directional move. If this scenario were to play out again, a potential range for VIX sets up with "support" located around 12.50-13.00 on the downside (site of 12.58, which is 25% of its February 2018 intraday high, and 12.71, the level corresponding with a 50% year-to-date loss), and an overhead ceiling near 16.50-17.00 (site of the aforementioned 20-day and 200-day moving averages, as well as the average one-year VIX reading of 16.97).
