It's Friday. It's Memorial Day weekend. It's … very likely to be really slow, as far as options go today.

Just a quick refresher before we get to the disjointed "random thoughts" section of our show. Options have time value. Not all time is created equal. Time that includes three days of no trading and a fourth day that contains very little trading and price action has way less value than four normal trading days. As such, traders tend to lower bids and offers into long weekends. This translates into lower implied volatility readings and declines in indexes like the CBOE Volatility Index (VIX) that proxy volatility.

Yada, yada, yada … we may see the 2015 VIX lows pierced again today, followed by a VIX "rally" on Tuesday, when the calendar itself catches up. It's not terribly meaningful; it won't really effect the tradable VIX complex.

Anyway, way back when, companies had to trade for a few months before their options listed. That's not at all true anymore; it takes like a week now, for most names. But not all names…

Why there are no $SHAK options? These requirements have to be met: http://t.co/JtiTTiKTbq We escalated to CBOE for special consideration.

— Nicole Sherrod (@TDANSherrod) May 21, 2015

I'm not entirely sure which condition Shake Shack Inc (NYSE:SHAK) violates. I also don't care; let's waive it. It figures to be a very popular options series when it lists. Not to mention it's going to see some nice high volatility, and we could use that in a widely followed name.

While you're waiting for SHAK options to trade, I highly recommend eating an actual Shack Burger -- they're awesome. Not sure they're "5,000x earnings" awesome, but I know more about burger eating than proper burger chain valuations. And besides, it's not just burgers:

"Shake Shack is considering the launch of a Chick-fil-A killer, according to a company filing.

"The burger chain's subsidiary, SSE IP, filed an application to trademark the name 'chicken shack,' CNBC reports.

"That could mean the company is testing a chicken sandwich or a new chain with a chicken-based menu.

"Shake Shack hasn't revealed any details of its plans."

And after that? How about going after Sirius XM Holdings Inc. (NASDAQ:SIRI)? We can call it "Radio Shack." Then a foray into '80s pop music with "Love Shack." Followed by a white paper on NBA fouling titled "Hack a Shaq."

OK, sorry. Never mind.

I do have a white paper for you, though, h/t Alexander Aljechin. So don't tell me you have nothing to read at the beach this weekend!

"This working paper develops first a mean-reverting logarithmic model for the VIX. In the next step the relation between the VIX and VIX Futures is modeled. VIX Options are evaluated by Monte-Carlo Simulation of Option-Trading Strategies. The model is also applied to the VIX based ETN VXX and VXX Options and extended to the VSTOXX and VSTOXX Futures."

And finally, #ThanksDave. I'm talking the David Letterman from the Late Night NBC years -- he was just awesomely funny and off the wall. I'm not sure old clips would do it justice. It was just great.

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

We saw a huge CBOE Volatility Index (VIX) surge yesterday morning. Our favorite fear-and-greed proxy jumped 15% out of the gate, which -- I will admit -- is pretty noteworthy no matter when it happens. It's especially interesting given that while the market was weak, it was far from an implosion. We dropped about 0.6% in the early trade.

The cause? Let’s call it "economic numbers that moderately beat expectations." Yes, the Fed might now tighten in four months instead of five months. Or "Greece"! Or ... I don’t really know; it really doesn’t matter. The point is, "Volatility is Exploding ... Time to Go To the Mattresses."

That is, until you put some context around it all. So please allow me to provide some context around it all.

VIX closed Thursday at a six-month low, and then was basically unchanged on Friday. In fact, this was almost exactly a six-month low. The last time we closed lower was on Nov. 26, the day before Thanksgiving. The fact that we last hit a local low on the session before a holiday, and now we did it again right before a holiday, is -- of course -- not a coincidence.

We mention this often, but it's worth noting again: On most occasions, VIX understates the "real" implied volatility ahead of long weekends, and then gives a much more accurate reading after the holiday. Options themselves have time value, and no one want to pay up for relatively worthless time (i.e., a long summer weekend).

Thus, it all leads to a misleading rally in VIX following the weekend, when it's viewed in percentage terms. The iPath S&P 500 VIX Short-Term Futures ETN (VXX) is a terrible product to own, as we all know too well. But around holidays, it's a decent proxy for volatility, as it doesn't really have the same calendar quirks. And it "only" lifted about 2.5% in the early trade. In short time frames, VXX tends to move about half of VIX, so that suggests the "real" VIX pop was more like 5% ... and the rest was likely more about the weekend.

But alas, we need even more context. The VIX lift took it all the way back to 14. That’s still low historically, but that’s actually a bit higher than we’ve seen lately. In fact, it's been just about three weeks since the last close with higher than a 13 full, and we can't blame that all on worries about paying weekend decay at the end of the month. So while the one-day percentage pop overstates the VIX move, the actual level of VIX does suggest we have a bit more fear than we’ve seen lately.

I’m not sure what's going to keep a fear spike going as we head into summer -- it's not a time of year we tend to see much of anything interesting. But hey, you never know!

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

Remember all the way back to … last week? You know, that time when spring was in the air and the CBOE Volatility Index (VIX) was in the 12s?

We were so carefree and complacent back then. But turns out maybe we should have been a bit more concerned? This, from Barron's:

"Rebecca Cheong, head of Americas equity derivatives strategy at UBS says on Friday that the VIX is unusually low compared with similar readings of expected price swings in European stocks, 10-year Treasury notes, the euro currency, oil and gold.

"Cheong says that the VIX doesn't tend to stay low versus all assets for long, which means that she expects the U.S. stock market to roll over in the month ahead. Since 2013, she finds that a VIX reading under 12 at the same time that the VIX is subdued relative to other assets 'implies investors were under-hedged when global risks rose,' and that the S&P 500 'lost as much as 5% in the following month.' When this happened in August 2013 and December 2014, the S&P 500 was lower both times."

Should we worry? Well, we're talking a sample size of two here, so that immediately gets me thinking that I can't prove or disprove anything. Do FIFA indictments cause big market rallies? They did yesterday, so there must be a connection!

I'm not even sure this VIX "rule" even worked those two times. Here's VIX vs. 10-year Treasury vol (VXTYN) going back to 2013.

We did see a big vol disparity in 2013, and again in late 2014. In gold (GVX)?

In 2013 -- yes. In late 2014, though? Not so much. And then there's oil (OVX).

There's nothing in 2013, but we did see a disparity in late 2013. But that disparity got larger and larger, and really the biggest disparity actually "predicted" a stock rally. And finally, there's volatility in the euro (EVX).

It's kind of similar to oil vol: nothing until late last year, and actually more "predictive" of a stock rally than anything else.

So, we really have a volatility lift in Treasuries and gold in 2013; not confirmed so much in oil vol, euro vol, or the VIX. And in 2013 into 2014, we had a relative vol lift in oil that has now dissipated. We're left now with relatively high Treasury and euro vol.

I really just don't see the case where this will lead us into any sort of doom. My best read is that volatility sloshes around a bit between asset classes. Perhaps we're due for a lift in stock volatility. It's now almost five months since the last noteworthy spike, so it's a reasonable call anyway. I just don't see the case that there's anything abnormal about spots of volatility around the investing sphere or that said volatility has enormous predictive value.

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

It's a week and a half or so into the life of AccuShares Spot CBOE VIX Fund Up Shares (VXUP) and AccuShares Spot CBOE VIX Fund Down Shares (VXDN), so it's high time to make some snap judgments!

And the verdict? They move a lot more like futures than "spot" so far. Just to review…

"The Up Share will benefit from increases in the Underlying Index and will be adversely impacted by decreases in the Underlying Index and by the Daily Amount, if any - the Down Class Share will benefit from decreases in the Underlying Index and the Daily Amount, if any and will be adversely effected by increases in the Underlying Index (both share classes subject to a maximum of 90% in either direction). The benefit to the Up Share Class is equal to the adverse impact to the Down Share Class and vice versa. Both share classes will have proportionate entitlements to Eligible Investments and any earnings thereon (as described below). Investors must choose either the Up or the Down Shares based on their individual opinion of the future direction of the Underlying Index."

But alas, it's not so simple as gaming your CBOE Volatility Index (VIX) opinion. There's an accumulated distribution that goes to the "winning" side, payable on the 15th of each month. And that distribution date appears to serve as a de facto expiration date.

Heres a five-day slice of VXUP vs. VIX. It covers the volatility drift into the long weekend, the "pop" upon the return from the holiday and an ugly Tuesday market, and then the drop in volatility on the Wednesday rally.

  

It was an interesting few days in VIX, but not so much in VXUP. On the other hand, here's VXUP vs. the iPath S&P 500 VIX Short-Term Futures ETN (VXX) over that same time frame.

It's not exact, but it's certainly a much closer relationship. The best description is that it's a more muted version of VXX, which I suppose has value if that persists, as it suggests it won't decline as much as VXX over time.

But that may not hold, as they're not the same thing. VXX tracks a rolling 30-day VIX future, whereas VXUP thus far trades like a future that's going to expire in the middle of the next month. So these two will presumably start to diverge soon, as well.

Again, it's very early. We don't know that this behavior will persist over the long haul. In fact, it probably won't. Right now, VXUP and VXDN are like futures with about 20 days to go. Soon they'll be like futures with two weeks, then one week, then … OK, you get the idea. As it gets closer to the 15th, they should move more with VIX itself -- right about until the distribution, at which point they will probably become VXX and inverse VXX replicas.

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

Happy Monday! If you were waiting all weekend for a good Twitter discussion about whether AccuShares Spot CBOE VIX Fund Up Shares (VXUP) will morph from tracking CBOE Volatility Index (VIX) futures early in the "cycle" to tracking closer to VIX itself later in the cycle, well … you're in luck! 

@agwarner $VXUP and $VXDN will probably track mid term futures even across distribution dates. http://t.co/tHJOAoWYtz

— Eli Mintz (@VixCentral) May 29, 2015

I don't at all disagree. My only point is that it will also track VIX itself as it nears the distribution date, peaking at Day 0 (the 15th). Anyway, here's what Eli has to say in his piece: 

"… [Y]ou are probably asking yourself, what about the Distribution Date and its implications? After all, the Distribution Date of VXUP usually falls near but not on the expiration date of the future and how is this analysis of arbitrage involving futures whose life spans several Distribution Dates relevant? The crucial point to understand here is that the Regular Distribution is a non-event value-wise for a VXUP position just as a split or a dividend are for a position in a regular stock. A split in the value of a stock does not change the value of the position held. As for a dividend distribution, the price of the stock goes down by the dividend amount on the ex-dividend day but the value of the whole position consisting of stock plus a cash dividend remains the same. Say that you know that the next day a stock is going to go ex-dividend. You also know exactly what the dividend will be. If you buy at the close extra stock with your anticipated cash dividend, your stock position will remain the same." 

OK, that's all true. The distribution is a de facto dividend. If you buy VXUP "Distribution On" on the 15th, you are doing the same exact thing as if you buy it the next day at the same price as the day before, minus the accumulated distribution.  There's no value added or subtracted by the mere fact that they're paying the distribution.

But that's not really the issue. Rather, it's whether the imminence of the distribution causes VXUP to track VIX itself. Which brings us to Eli's next graph: 

"Holders of VXUP can do exactly that at the close of each Distribution Date. Because the rules of the Regular Distribution are fixed and known in advance, an investor can anticipate exactly how much cash he will receive (if at all) and purchase additional VXUP in that amount."

And that's my only real point. He anticipates that exact amount by knowing the distribution amount in the "bank," plus the move in that last day. And that last day move is entirely the move in VIX itself, as best I understand it. So, the move in VXUP on Day 0 should achieve maximum correlation with VIX itself. He goes on: 

"In this way, the Distribution Dates become non-issues in relation to arbitraging VXUP and the VIX futures (the only risk being lack of liquidity resulting in large bid-ask spreads)."

That's likely true, too. I would suggest the real issue is none of this is mutually exclusive. 

Or maybe that's the real non-issue. This is giving me a headache, and we'll have a better idea when we actually see it. Maybe VXUP gets huge someday and it starts dragging around VIX futures? I doubt it, but who knows?

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

It seems like a lifetime ago now, but back at the end of 2014, there was a bit of a CBOE Volatility Index (VIX) rush. It closed at 19.20, virtually guaranteeing that year-to-date performance would look misleadingly bad in 2015.

And, sure enough, here we are five months into 2015. The SPDR S&P 500 ETF Trust (SPY) is up in the 2%-3% range and basically churning and churning. That should translate to VIX losing about 10%-15% of its value -- yet, using the last day of May as the endpoint, VIX has dropped 28%! Complacency, I say! 

Well, I'm kidding. As we note periodically, it highlights the problems of arbitrary endpoints more than anything else. I'm fairly certain I can prove anything statistically if I can carefully choose both endpoints. 

Mean VIX gives a better indication. And as Russell Rhoads notes, that's actually telling a very different story this year:
 

"As of the end of May the average for VIX this year was 15.30, while in 2014 the average at this point was 14.22. There are more volatility indexes that consistently measure implied volatility as indicated by S&P 500 index option pricing and all have been higher in 2015. VXST (9-day volatility) averaged 13.68 for the first five months last year and averaged 14.28 this year. Farther out on the curve the differences are even more dramatic with VXV (3-month volatility) averaging 17.30 this year versus 15.45 through five months last year and VXMT (6-month volatility) averaging 18.91 versus 16.80 in 2014."

When viewed through a "mean" lens, volatility has actually lifted in 2015 vs. the levels we saw at this point in 2014. What's more, the longer the volatility measure, the larger the lift. Fear, I say!

Well, we're not exactly in a major fear cycle yet. Perhaps we're transitioning, at least so far as the longer-term view is concerned. Here's the mean VIX every year going back to 1993: 

 

 

Now, I couldn't figure out how to auto-label the horizontal axis, so let me explain. Each bar represents one calendar year. So the furthest left is 1993, the next is 1994, and so on -- ending at 2015 all the way on the right. 

As you can see, mean VIX ebbs and flows over time. The pops toward the left were during the tech bubble and bust, the pops toward the right were centered around the financial crisis of 2008.

The troughs tend to last 3-4 years, and we're pretty clearly in Year 4 of the current trough. It's highly likely we close 2015 with a higher mean than in 2014, and we close higher in 2016 than 2015. Volatility is pretty cyclical. 

But even if that comes to pass, it's unclear whether that means the market itself will crack. Perhaps we simply get more volatile on the upside. That's what happened in the late-90s volatility, and stocks lifted side-by-side for more than three years before the bubble finally burst.

If you're old enough to remember 1996, you might recall the term irrational exuberance. Then-Fed Chairman Alan Greenspan uttered it at the end of 1996. Stocks were pretty clearly on the high end of normal at the time. If you sold then, you got out ahead of the volatility lift, but you also missed huge market gains over the next few years.

Not saying we're headed to a similar stretch. I'm just saying that while I do expect volatility to climb, I don't necessarily think that has to coincide with declining stock prices. 

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

Disbelieving rallies certainly makes sense in 2015, seeing as we're in a never-ending churn. Thing is, though -- even with all the fits and starts, we sit very close to all-time highs in pretty much every index, and that's even after an ugly day yesterday.

So, while lack of conviction is understandable, it is noteworthy in the sense that while the rallies fail to impress, we've yet to have much in the way of a scary sell-off, either… well, at least until today's jobs number comes in above expectations, at which point, LOOK OUT! 

Just how much do we hate this market? There's this from some guru named Todd Salamone, Schaeffer's Senior VP of Research:

 

AAII 4-wk avg. percentge bulls at multi-yr lows with $SPX near highs. Looks like May '13- preceded bull period $SPY pic.twitter.com/ZWytg2G5NM

— Todd Salamone (@toddsalamone) June 4, 2015

  

No one wants to admit they like the market. But do they actually do anything about it? Well -- yes, if you look at the CBOE Volatility Index (VIX) Industrial Complex: 

"Year-to-date, roughly $1.9 billion has flowed into ETFs wagering on a rise in volatility, while some $1.1 billion has flowed out of ETFs betting on a drop in volatility, based on a Reuters analysis of FactSet data. Investors have been punished for those decisions. 

The biggest long volatility-focused ETF, the iPath S&P 500 VIX Short-Term Futures ETN, for example, has attracted $766 million in new investments this year -- while it is down about 40 percent. At the same time, money has been flowing out of ETFs that bet on low volatility. The VelocityShares Daily Inverse VIX Short-Term ETN, for example, is up 45 percent this year but has had $680 million in outflows." 

And this:

 

Looks like this June-July $VIX 20 spread is now up to 95,000 total now.

— selling_theta (@selling_theta) June 4, 2015

 

That's a good old-fashioned roll, most likely. Someone holding VIX out-of-the-money calls rolls them out in time to play for the inevitable "someday" VIX pop. And it will indeed work someday -- but just remember, when you hear about the guy buying cheap VIX calls in size and having them quadruple, he's not mentioning that it took him six rolls at 50 cents a pop just to get to the point where he makes back some of what he lost on the trade. 

I hate the rally, too. Or really, the lack thereof. You never feel like you missed anything. There's no sense that you better buy now lest it run away before you get around to it. I guess when I totally give up, we'll boom! 

And hey, if you want to diversify, there may be a sports investment fund opening up at a street corner near you! This, from ESPN:

"Nevada Gov. Brian Sandoval signed a bill into law Tuesday that will give out-of-state residents access to the Nevada's licensed sportsbooks through sports betting investment funds.

Senate Bill 443 allows Nevada business entities to apply for registration for the purpose of betting on sports and racing at the state's sportsbooks. Essentially it legalizes sports betting investment funds, similar to traditional mutual funds, that are registered and managed in Nevada but which could include participants from outside the state."

Going forward, game fixers will now be known as "Activist Sports Investors." 

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

I know I harp on the overstatements of volatility in financial media, but I’m pretty sure it reached a crescendo on Thursday afternoon. So help me, I heard a guest on CNBC talk about increasing vol about every 10 seconds.

The Nasdaq chair even came on and noted the uptick in vol and predicted higher vol ahead -- and then proceeded to contradict his argument by pointing out that 100-pt moves (in the Dow Jones Industrial Average, I assume) aren’t as meaningful now that price levels are this high. I take that all to mean that yes, we’re really volatile, if you take the absolute gains and losses in the indices of today and relate them to the absolute levels of the indices 20 years ago. Which, of course, makes perfect sense.

 

That’s not to say there’s not actual actual volatility out there. Currencies are flying all around. The euro exploded mid-week, then the dollar bounced big on Friday. Euro bonds are going a bit nuts, and our bids have picked up vol steam as well. And it's certainly not beyond the realm of possibility that it all eventually sloshes over to our stocks.

 

It just hasn’t yet, despite what they keep telling us. The SPDR S&P 500 ETF Trust (NYSEARCA:SPY) had a somewhat ugly week amid a rather churning and frustrating year. But it did not have a day last week with a greater than 1% top-to-bottom range, though Thursday was almost exactly 1%. A volatility of 16 implies that two-thirds of days have ranges within 1%. So, we’re talking a peak of about 16 volatility on a week we can’t stop talking vol.

 

If 16 VIX is our new standard of big vol, then I suppose I’m entirely wrong, and volatility is back in a big way! But I suspect no one thinks that; 16 vol is modestly high vs. what we’ve seen these last few months, as it's far from a moon shot.

 

Again, the euro and euro bond vol could transfer to U.S. stock vol. There’s also about 1,000 reasons why vol can go higher. And, of course, it will go higher; it always does eventually. Which brings me to another pet peeve: “Uncertainty."

 

Uncertainty is always the blanket excuse for everything. It's why we can’t buy stocks (uncertainty about the timing of rate hikes), why Company X is underperforming, why the Mets never sign good free agents, et. al.

 

And it's an excuse that’s beyond ridiculous. There’s. Always. Uncertainty.

 

If there wasn’t uncertainty, options volatility would be about zero. Every stock would be perfectly priced, so why do we need options? In fact, I could make the case that the CBOE Volatility Index (VIX) is as good a gauge as any for the level of actual uncertainty. The higher the VIX, the more uncertainty going forward. If VIX is 13, people aren't all that uncertain about future interest rate hikes. Or better: They’re not all that worried about the timing of the hikes.

 

But I know I’m talking to a wall on this. Constant features about the imminent rise in volatility are here to stay. It doesn’t mean they’re right. I mean, one of them will be very well-timed, most others will not. It's just a standard part of the financial conversation that isn’t going anywhere. 

 

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

We're getting closer to "distribution" time in AccuShares Spot CBOE VIX Fund Up Shares (VXUP) and AccuShares Spot CBOE VIX Fund Down Shares (VXDN), and that means we're getting closer to seeing how VXUP resembles the CBOE Volatility Index (VIX) itself (the hope), as opposed to the iPath S&P 500 VIX Short-Term Futures ETN (VXX) (the fear). 

The early cycle verdict was that VXUP should act just like VXX, thanks to the arb mechanism that keeps it in line with VIX futures. My thought (hope) was that as the distribution date neared, VXUP would move more in line with VIX itself, culminating on the actual day before the distribution. 

So far, my thought (hope) looks wrong. Here's how VXUP looked last week vs. VIX. 

 

VIX had a bit of a range last week, relatively speaking, but you have to squint to even see VXUP on there. That's not a good sign. The idea behind VXUP and VXDN was to let investors better play tweaks in VIX itself. On the other hand, here's VXUP vs. VXX.  

   

And so it remains. VXUP simply follows VXX around, albeit with more muted swings. It looks no different than it did "early" in the distribution cycle, strongly suggesting that the actual distribution will not have much (or any impact) on VXUP. 

I still expect VXUP to track VIX on Day Zero. A VIX future with one day left would pretty much track VIX, setting aside that VIX future and options settlement is different (modestly) from VIX itself. But that's utterly meaningless. 

And on top of, the markets are still wide, and the volumes are very light. That's all a real disappointment. 

There was absolutely no need for another VXX. It's well-known (I always hope) that it's a terrible long-term hold. But at least it's liquid and almost always active. It's a reasonable way to speculate on a short-term VIX move. It catches about half the VIX move in percentage terms on a day-over-day basis, so adjust your beta accordingly. And don't stick with it for too long. 

Unfortunately, VXUP and VXDN are going to go off the radar before they even get on anyone's radar. If you want to ride The Next Great Volatility Pop (already underway, perhaps), might as well just stick with VXX. 

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

I feel like I spend every other day disabusing anyone who listens to me of the notion that we're in volatile times. Unfortunately (on this topic at least), I would guess those who scream "VOLATILITY!!!!" the loudest reach about 100,000 times the audience. 

But there's hope! I bring you this, from ValueWalk… 

They graph the day-over-day moves in the CBOE Volatility Index (VIX) for each calendar year back to 1991, and plot them all on one graph. And it's one big jumble. But then in the next graph they highlight 2015 and, believe it or not…

"Interestingly, 2015 is close to the all-time low in lessened volatility. 

"The only other years lower than 2015 (at the time of writing) -- 1992 and 2001." 

And there you have it. Now, the finding is a little odd in that implied volatility was elevated in early 2001, whereas it was muted in 1992. 

And the most important question, of course, is whether it meant anything for the markets. Well. 

"Overall, right about this time in 1992, things went south in a marginal manner.  The S&P 500 traded in a fairly narrow range, and then experienced strength in November/December to end the year +5%. 

"In orange [on his graph] is the 2001 experience.  Interestingly, as with the 1992 experience, right about now the market went south.  The S&P 500 dropped about 25% over the next four months before gaining some of the lost value back later in the year." 

Thus, there's not much predictive value in this. We're only talking a sample size of two to begin with, so I'd say there's no chance to find anything predictive anyway. But the fact that it was two such diametrically opposite results certainly doesn't help. 

And I could make the case that there are similarities to both. We're at low absolute volatility levels like in 1992. And then, as now, we were several years into a steady rally. Also similar, that rally had stalled a bit; 1991 was the weakest market year for what turned out to be about a 13-year stretch. 

On the other hand, if you're a "Bubble-ist" you could say we look like 2001. Hot IPOs, pockets of booming tech, et. al.

So who knows? I just love the fact that someone's pointing out that we're actually not that volatile! 

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

The CBOE Volatility Index (VIX) is called the “fear index” by just about everybody, so it’s easy to forget that it’s merely one way to gauge fear among countless others. Fortunately, CNN quantifies several into their own proprietary Fear & Greed Index.

We were at “Fear” before yesterday’s blast-off, but still a bit above “Extreme Fear.” I’d view this as a contrary indicator, but these sort of sentiment tells are tough market-timing tools. As we know too well, extreme fear can beget really extreme fear before it finally turns. We hit the 90s about this time last year, and in hindsight, that was a good sell signal -- although it took another month or so before that played out.

Our level of “fear” now seems pretty appropriate. The market rotated between churn and downright ugly in recent weeks, so a bit of apprehension seems warranted. So, the actual level of the overall index doesn’t tell us much. The breakdown of how CNN gets there is more interesting.

The index contains two options indicators. One is based on put/call volume; the other is based on VIX and its 50-day moving average. CNN rates both of these “neutral,” which I can see surprising people on both sides of the VIX debate. Half see us in some sort of volatility pop that doesn’t quite exist yet, whereas others see the absolute level of VIX as rather low. I guess, given that debate, neutral is about right. I’d throw in that VIX is pretty neutral vs. realized volatility, and VIX futures are neutral in that they’re in their permanent overbid in the out months.

So, where’s the fear showing up? CNN highlights three spots:  

"Stock Price Strength: The number of stocks hitting 52-week highs slightly exceeds the number hitting lows but is at the lower end of its range, indicating extreme fear...

"Stock Price Breadth: The McClellan Volume Summation Index measures advancing and declining volume on the NYSE. During the last month, approximately 11.35% more of each day’s volume has traded in declining issues than in advancing issues, pushing this indicator towards the lower end of its range for the last two years...

"Market Momentum: The S&P 500 is slightly above its 125-day average. During the last two years, the S&P 500 index has often been further above its 125-day average than it currently is, so declines like this indicate extreme fear."

I could make the case the latter is more of a support/resistance line than anything else. The market has clearly stalled, but as you can see on CNN's chart, it’s bounced off the 125-day MA a few times in this run. We’ll see if that happens again.

The first two are more worrisome, though. Declining breadth is never a good sign; it suggests that there is more pain out there than the rather tame basic indices would suggest. Ironically, sputtering Apple Inc. (NASDAQ:AAPL) could help that picture. It’s such a large component of the indices that breadth might start looking relatively better if there’s a flow of cash out of AAPL and into ... not Apple. All in all, it’s some sluggish numbers behind some sluggish market days.

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

Everybody keeps trying to play "Pin the Tail On the Fed-Timing Donkey" game. And if history is any guide, we're not likely to play the game very well. From Business Insider: 

"Last time the Fed raised rates, the market was wrong.

On Twitter on Thursday, the FT's Robin Wigglesworth tweeted the following chart, showing the market's expectations for the Fed during the previous cycle in which the Fed was raising rates from 2004-2006. Every step of the way, the market thought the Fed would raise rates less than it actually did."

The takewaway, of course, is that the masses underestimated the speed and magnitude of the hikes during the last tightening cycle. And most importantly, the market itself did very well from 2004-2006, while volatility got crushed.

Fast-forward to 2015, and we have a general expectation that the Fed will drag its heels but start raising rates slowly soon. That will, of course, tank the markets, since the only reason stocks are this level is the Fed. And, of course, this will beget a Dystopian Hellscape of rising volatility, taking the CBOE Volatility Index (VIX) all the way into the 20s, and ensuring that everyone who has rolled out-of-the-money VIX calls for five years now will lose slightly less money.

Fortunately, as the 2004-06 example demonstrates, none of this has to come to pass. I don't remember exactly how obsessed we were with the "Fed tightening cycle" back then, but I suspect it was nothing like the mania today. And it's a sample size of one, so there's absolutely no saying history repeats itself.

It does highlight a good point, though. Rate tightening in and of itself will not end the bull run. That's because it's presumably accompanied by a rising economic tide, or else they likely would cease the hiking. The real risk is that the Fed does a lousy job of gauging the economy. So, if you feel they're tightening into a downturn, then yeah --sell, Mortimer, sell. But, if it's just a knee-jerk, "Fed tightens, must sell" reaction, then it's likely a bad idea. Rates are zero now -- there's a lot of tightening to go before we start getting to the point where it's a serious crimp.

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