How Oil Volatility is Affecting Stocks

The CBOE Crude Oil Volatility Index (OVX) pop has dragged CBOE Volatility Index (VIX) higher

by Adam Warner

Published on Dec 15, 2014 at 8:47 AM
Updated on Apr 20, 2015 at 5:32 PM

And the early "VIX-mas Miracle" marches on. CBOE Volatility Index (VIX) closed last week at 21.08, the highest absolute level on a close since Oct.17, 2014. It also now sits at 35% above the 10-day simple moving average (SMA) -- very firmly into overbought territory. The last close that far above the 10-day SMA was on Oct.13, 2014.

Yada yada yada, we're in a rerun of the October volatility pop. Except really, we're not. Back in October, volatility was somewhat slow to react to the market selloff. SPDR S&P 500 ETF Trust (SPY) peaked on Sept. 18, 2014, and then dropped about 5% over the course of 15 trading days before VIX finally closed overbought. This go-around took all of three days, and a 2.5% SPY drop. The worries clearly preceded the actual fall. Though, so far, those worries look like they had some merit, as the market has continued to drop and VIX has continued to pop.

I really hate ascribing a volatility pop to any specific driver. But it sure looks like we have one this time. Oil, that is. Black gold. Texas tea.

Way back -- a few weeks ago -- we noted that oil volatility (proxied by OVX) had surged to unprecedented heights versus VIX. Volatility does often spill over from one asset class to another, and I anticipated that it would resolve with a small VIX lift and a big CBOE Crude Oil Volatility Index (OVX) drop. Well, not so much.

Crude can't find a bottom, and OVX continues to surge. Even with the VIX pop, OVX is still relatively high. It still has to resolve. I do like fading overbought VIX, but it's painfully clear that play will look lousy until crude stabilizes. As to VIX futures, well -- they believe! Sort of.

VIX Futures Historical Prices, Oct. 10, 2014 to present

The whole board sits at a discount to VIX itself. But, futures act better now than they did during the October VIX pop in all but the first cycle. And that near-cycle underperformance is generally a calendar quirk, thanks to the upcoming holidays.

Color me very surprised by the recent options action. But, I guess that's why it happens -- we collectively let our guard down and … wham. I do believe it passes soon, but we'll have to wait and see.

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


A Schaeffer's exclusive

TOP STOCK PICKS 2020

Access your FREE insider report before it's too late!


 
 

Partnercenter


NEW! Explore Schaeffer’s Partners' deals and get connected to top online brokerages with deals tailored exclusively for our readers.  Get answers to your questions regarding transfer fees, commission rates, programs and available discounts related to online trading services.

MORE | MARKETstories


IRA/401k: The Crash-Proof Retirement Plan
Use gold to protect any IRA, 401(k), or retirement account from a looming financial crisis.
Stocks Eye Notable Weekly Gains on 3-Day Surge
Stocks are eyeing big weekly gains
WW Stock Brushes Off Bull Note
Morgan Stanley upgraded the Weight Watchers parent to "overweight" from "equal weight"
IRA/401k: The Crash-Proof Retirement Plan
Use gold to protect any IRA, 401(k), or retirement account from a looming financial crisis.