Are We in the Beginning of a VIX Regime Change?

Yemen is the latest 'cause' for an uptick in volatility

Mar 27, 2015 at 9:14 AM
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As savvy late '80s options trader David Coverdale once sang -- "Here We Go Again."

Yes, it's yet another market drop/CBOE Volatility Index (VIX) pop. It seems like only a week ago we had gotten comfortable with the fact that the Fed would manage to get the word "patience" out of its statement and not spook the markets. Wait … that was only a week ago.

We rallied for a couple days, but have gotten quite ugly since. VIX made up the entirety of its large drop last Wednesday. But we're still a bit away from getting "officially" overbought. Depending on the timing, it's going to take a close near 18.

Maybe it's a little shakier this go around since we don't have our usual cast of drivers for the turn this week. "Causes" for market moves are often specious (to say the least). TV needs to come up with a "reason" for every move, but in all fairness, we humans do like explanations, so it's tough to blame them. It's just usually in the form of "here's the news backdrop, and here's the market move, so ergo the news led to the market move."

So, for what it's worth, we're blaming Yemen and worries about a mediocre earnings season for the current bout of malaise. The irony is that if you buy the Yemen part, it's putting a bid under oil. It wasn't that long ago that we were blaming cascading oil prices for market dips.

The volatility market has acted pretty unemotionally to the recent selling. Here's the VIX futures:

VIX Futures Term Structure in 2014

That's pretty much how VIX futures always look -- it just flattens out slightly as VIX lifts. And VIX itself around 16 doesn't tell us much in a vacuum. It's still down in 2015 … about 18%, in fact. But as you may remember, VIX spiked into the close of 2014, which makes comps kind of misleading, given it just uses an arbitrary endpoint.

"Mean" VIX for 2015 is 16.67 so far, which is a considerable uptick from 14.17 in 2014. It's not a perfectly fair comp. Summer tends to weigh on volatility, as do holiday stretches. On the other hand, we haven't had our annual Fall VIX-plosion yet, either. We do figure to close the year with a higher mean than 2014, though, as we're likely transitioning from the low-volatility "regime" of the last five years or so into a high-volatility "regime." And that's just a long-winded way of saying one of these volatility pops will actually "stick."

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


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