VIX With An 8 Handle

The VIX seems to keep reaching unprecedented levels. I guess it’s fair to say this is expected because the short VIX trade has been very popular as traders feel it’s a way to mint free money. Personally, I think it’s better to sell some of your stocks instead of buying the VIX for protection. When you sell stocks, you get to choose which stock you think is the least undervalued. Buying the VIX is a lazy way of buying protection. One issue obviously is paying capital gains taxes, but you can take that into account when deciding what to sell. Selling a small portion of a position to avoid taking too much risk shouldn’t be that challenging.

The VIX finally hit a new all-time low today. As you can see in the chart below, it fell to 8.84. The yellow highlight represents the trading days in the last 3 months. The VIX has had 17 of the lowest 26 closes in the past 3 months. Obviously, the VIX doesn’t have that long of a history. I would be interested to see what the VIX would have traded at in the 1920s stock market rally. It may have made trading more extreme since many bears are claiming that when the short VIX trades unwind due to a rising VIX, there will be large losses which will encompass the entire market. With the short VIX trades the largest in history, it remains to be seen what the effects will be if volatility returns. I can’t say if that hypothesis is correct because we don’t have much precedent to go by. One thing I would like to point out is that many bears claimed that when there was a crash in the cryptocurrency arena there would be echoes in the normal markets. There were large losses earlier this month when Ethereum fell over 50%, yet there were no problems seen in the stock market or bond market.

My final take on the VIX is that I think it is accurate in its prediction that the next 30 days won’t have a lot of vacillations to the downside. Unless Amazon and Apple report disastrous quarters, there isn’t much uncertainty coming in the month of August. The top news story is whether the GOP passes healthcare reform and that hasn’t been moving the market.

Skinny Healthcare Plan

Moving to the healthcare legislation, there were two votes in the Senate which failed. Repealing Obamacare and replacing it with the GOP healthcare plan got 43 votes. Repealing Obamacare after a two-year window got 45 votes. This was an important step towards clarity as we know exactly how close the goal post is. Obviously, it’s still possible for another plan to lose votes, but the Senate is pretty close to getting something done. As I mentioned in a previous article, the plan to do a “skinny repeal” where medical device taxes are removed and individual and employer mandates are removed is gaining traction.

The “skinny repeal” plan might work depending on which way it progresses. Rand Paul, a conservative, and Dean Heller, a moderate, support the plan. It’s obvious Rand Paul would support it since it is his idea, but it gives you an idea of which direction it’s going in. No Senator has said he/she will oppose this plan, but many still must consider the plan. It’s very simple, but some Senators don’t want to go on record supporting a plan until they see the legislation since many bills have changes added to them at last minute. Assuming the Senate passes the “skinny plan”, the two possible ways it can go is the Senate and the House having a conference committee or the House simply voting on it. Rand Paul wants the House to simply OK it, so it becomes law without any more changes. In my opinion, if the “skinny plan” doesn’t get done, then nothing will. The idea that the House could stay in session until Saturday to pass the “skinny package” was floated by House leadership.

Initially, I thought Congress would stay in session until August to hash something out. Then when John McCain was found to have cancer, I thought nothing would pass. McCain was able to return to Washington, making things interesting once again. I don’t think time will be an issue with this legislation. If the Senate is close to getting something done, I think they will stay an extra week. However, that might not be necessary because the “skinny legislation” is simple. The determining factor will be what path it takes if it passes. I expect it to pass the Senate with 50 votes just like the motion to proceed with discussions got. The House is more conservative than the Senate, so it won’t be happy with the lack of a full repeal. However, if no pork is added to the bill, I can’t see why the House wouldn’t pass it. It is a small victory with no downside for them.

Conclusion

The VIX keeps going lower as risk has been taken out of the market by great earnings reports and a dovish Fed. Risk is only gone temporarily as there will certainly be problems in 2018 as central bankers unwind their vast experiment. As with everything in Washington, I can’t give a straight answer on how the stock market will react to a “skinny plan” being passed by the end of this week. It’s a good indicator that the debt ceiling will be raised easily and that tax reform might be done by the end of the year. However, it’s not clear if this plan would push discussions of further healthcare reform to the side. If this is the only thing that can be passed, it might end the discussions until after the 2018 mid-term elections. The good thing for the GOP is that passing tax cuts right before a big election is better than debating healthcare reform which is more controversial.