VXX Still Defying Gravity -- But For How Long?

The iPath S&P 500 VIX Short-Term Futures ETN (VXX) has gone a full calendar quarter without a new low

Adam Warner

Mar 5, 2015 at 8:09 AM

Speaking of iPath S&P 500 VIX Short-Term Futures ETN (VXX) … it continues its 2014 pattern of behaving unhorribly (for lack of a better word). We got fairly close to taking out the all-time lows of 25.64 set all the way back on Dec. 5, but alas, the Nazz hit 5,000 and that apparently became a psychological symbol and time to start selling stocks. Or, at least, time to take a break chasing them higher.

So we never made it, and have now gone an entire quarter since the last VXX record low. That's 60 calendar days, and it's time we update the VXX Lows Table … a.k.a. "Days without an Accident" at The VXX Factory.

It's now the fifth-longest VXX competence streak ever! And we're two-and-a-half weeks of holding water until we get all the way up to the third-best ever.

Why does VXX continue to behave less badly? Mind you, all we're talking about is, indeed, "less bad." VXX is down about 13.6% in 2015.

One factor is the demand for VXX, as we noted yesterday. It's debatable whether that demand is bullish or bearish for the market itself, but it's not debatable that it helps support VXX itself, so long as the laws of supply and demand exist.

Another factor is simply lucky timing. VXX was probably a few days away from taking out the lows, but the market simply stopped lifting.

But neither can hold up forever. Volatility itself is modestly high versus realized volatility, and CBOE Volatility Index (VIX) futures are at a premium to VIX. So if/when the market pullback ends, VXX will resume its descent. In fact, the near-month contango is as steep as it has been in a while (click chart to enlarge).

VIX Futures Term Structure March 2015 - October 2015

Remember, the steeper the slope, the greater the headwind on VXX. I'm sticking with my position from The Great Options Tweeter VXX Debate of last month: VXX dips not from rolling a VIX future itself, but rather from the implied cost of time decay of holding a VIX future. The steeper the contango, the steeper the cost of holding a future over any unit of time.

And this slope is quite steep in the nearest two cycles, which will not resolve well for VXX. So this streak of VXX competence could end soon, after all.

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

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