E The VIX Will Achieve Its Lowest Levels Ever...In Time

You’ve heard me say it time and time again, read it maybe a couple dozen times and possibly benefited from it when it has or will come to fruition: “Volatility or the VIX can remain complacent for far longer than it expresses high levels of fear”. Given that statement and the nature of volatility being what it is, you probably guessed, if you are reading my works for the first time, I’m short volatility and have been for many years. In fact, my greatest short position in both size and ROIC is ProShares Ultra VIX Short-Term Futures ETF (UVXY). UVXY is a short, VIX-Leveraged ETF that benefits from a correlation and collection of VIX Futures contracts. It is designed to decay in share price over time. The chart below offers a review of the VIX over the last 30-day period.

On May 8th the VIX hit a multi-year low of 9.67 before finally spiking to just over 11 in a few days on May 11th. Regardless of what month and what year, the monthly chart will generally look as it does in the above chart a vast majority of the time. Below is a chart of the VIX over a 10-year period.

Looks pretty familiar to the monthly chart of course and demonstrates the nature of complacency quite well. Sure there is a nasty volatility spike every now and again, but as counterintuitive as it might sound, it truly is nothing to be feared. If we truly desire to resurrect the Freudian understanding of fear and its nature over any extended period of time we come to appreciate the psychology of fear very well. But let’s be honest, we don’t need Sir Sigmund Freud to tell us what the charts clearly identify: Fear is fleeting and a variable of constant decay. In other words, fear subsides in the human mind; we become desensitized to fear within a reason of exposure to fear. And that’s the key to fear and volatility as a whole; where there is greater exposure there is greater desensitization. Certainly, since 1999, the global markets have experienced a great number of fearful events. The dotcom bubble bursting, Gulf War, Financial Crisis, Greek Debt Crisis, conflicts on multiple fronts around the globe, increasing numbers of terrorist attacks and political turmoil uprooting countries and the foundation of unions have all plagued the 21st century. That’s a lot of fear, but the charts don’t lie, they validate or exonerate preconceived principles and understandings. It’s often noted or offered that the VIX “mean reverts”. While that is seemingly true, on the surface, it’s quite incomplete. So with that said I’ll offer that if you think we’ve already seen an all-time low in the VIX over the years just give it time: “The VIX will always seek out and find a new all-time low in due time”. It’s basic psychology; it has to. So if one thinks today’s VIX levels are low, they will likely become the norm over time. 

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Disclosure: I am short UVXY

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