VIX Below 10 Handle: Should Be Even Lower

The stock market had an amazing week as optimism surrounding earnings season pushed stocks higher. Investors are ignoring the nonsense in Washington because it’s mostly hot air. The fact that there disfunction in Washington instead of it easily passing bad laws caps the amount it can hurt stocks since nothing is getting done. The S&P 500 rose 0.47% on Friday, sending the Shiller PE up 30.11. That’s bad news for long term returns because margins usually mean revert. However, until margins stop accelerating we don’t have to worry about this. I’m expecting margin growth to decelerate in Q3 and Q4, but there needs to be a strong catalyst like economic weakness to bring them lower causing a bear market. The VIX had another sell-off which is shocking in terms of where the VIX has been historically, but not surprising when you look at the recent trading in stocks. This year the VIX has averaged 11.54 in 2017 which is the lowest yearly average ever. The second lowest average was 12.42 in 1995.

The VIX is now at 9.51 which means it’s bringing the average even lower. The chart below shows why the VIX price isn’t surprising. The realized 30 day volatility is at 7.43 which is obviously lower than what the VIX trading at. I read a comment on Twitter where someone said that the opinion that the VIX is too low ignores realized volatility. While some may be ignoring this, I think the people who say the VIX is too low are predicting higher realized volatility because they think the market is too complacent. The blue line shows the VIX’s term structure which shows that many are expecting the VIX to rise closer to its long run average. Therefore, it is possible to make money by going long the VIX if you think it will stay near the level it’s at now.

(Click on image to enlarge)

To be clear, when I say you can make money by going long the VIX, I’m not saying I expect that to happen. As you can see from the chart below, the VIX’s seasonality is strong as it is often low in the spring and early summer and then starts to increase from August to November. Coincidentally, that’s when the Fed has decided to start unwinding its balance sheet and it’s when the ECB will announce the 2018 tapering. I’m not saying that the timing of these polices is bad because of calendar issues. I’m more focused on the potential changes at the Fed as this policy is about to kick in to high gear. Even if Trump appoints a dove, they might continue with the unwind if nothing goes wrong. Even Brainard, who is a big dove, recognizes that balance sheet normalization is coming. I think whoever is at the Fed will ‘play it by ear’ meaning keep it gong if there’s no strife in the stock market and slow it down if there’s a sell-off.

1 2 3
View single page >> |

Disclaimer: Neither TheoTrade or any of its officers, directors, employees, other personnel, representatives, agents or independent contractors is, in such capacities, a licensed financial adviser, ...

more
How did you like this article? Let us know so we can better customize your reading experience. Users' ratings are only visible to themselves.

Comments

Leave a comment to automatically be entered into our contest to win a free Echo Show.