Jesus, Will Someone Wake Up the VIX? It’s Passed Out Drunk

By Heisenberg

Yeah, so picking up mid-stride where we left off this morning on how anyone buying equities at this point has, to quote SocGen, “a problem,” we would note that there’s one saving grace.

That is, while buying at ridiculous multiples dooms your excess returns (i.e. returns above risk-free Treasurys), it doesn’t necessarily mean you’ll wake up tomorrow to a massive drawdown that will wipe out half your investment.

See the thing is, you can buy at valuations that are in the 80-100th percentile versus history as long as volatility remains passed out drunk on the couch. Don’t believe us? Just look:



See there? Everything will be fine as long as vol stays glued to the proverbial flatline.

Seen in that light, it’s no wonder buying equities worked in Q1, because as Goldman notes, we just witnessed the calmest first quarter in terms of average VIX level of all time.

Via Goldman

Lowest Q1 VIX level on record

  • Despite a quarter characterized by elevated policy uncertainty and an intense focus on tax reform, infrastructure spending and deregulation, U.S. equities had one of their lowest volatility quarters on record.
  • The average VIX level in Q1 was 11.69, the lowest first quarter in VIX history. Low volatility levels were persistent, with the VIX trading in a tight band between 10.6 and 13.1 over the first quarter.
  • If we include all calendar quarters, Q1 2017 was the second lowest quarterly average VIX level back to 1990; only ranking behind Q4 2006, when VIX averaged 11.03.


S&P 500 realized volatility: lowest Q1 in five decades

  • Was the low Q1 VIX justified? Judging by SPX realized volatility the low Q1 VIX was not that surprising. The VIX is a market based expectation for S&P 500 realized volatility and when the market isn’t moving the VIX will reflect that by dropping to the low end of its historical range. And the market really wasn’t that volatile in Q1.
  • While the VIX has only been around since 1990, we can use S&P 500 realized volatility to provide broader context. S&P 500 calendar quarter realized volatility was 6.69, the 4th lowest Q1 since 1929 and lowest Q1 since 1965. S&P 500 realized volatility over the first quarter of 2017 ranked in the fourth percentile across all quarters back to 1929.

Low VIX does not suggest an impending market decline

  • In our “VIX as a market timing signal” report we showed that contrary to popular belief, a low VIX has not historically signaled an impending market decline. After a VIX decline below 11, median VIX levels over the next week, month and quarter were all fairly low at 11.1, 11.4 and 12.1, respectively. This quarter followed that script perfectly, averaging 11.7.
  • Economic data also points to a low VIX: Estimating the VIX based upon payrolls, ISM levels and economic policy uncertainty suggests an average VIX level of 13.7, two points higher than the Q1 average.

“Why is the VIX so Low?” A Macro Strategist’s 4-Word Answer

By Heisenberg

On Wednesday, we brought you the latest from Bloomberg contributor Cameron Crise who has been batting close to 1.000 lately in terms of “things that HR readers apparently like to click on.

Crise looked at credit card spending and suggested that unless consumers start tapping revolving credit lines, the promised economic renaissance might not materialize after all.

He also noted that paradoxically, consumers will be sowing the seeds of their own demise should they decide to whip out the plastic again.

Well on Thursday Crise is back, and this time he’s looking to explain why the VIX has been persistently low. Now to be sure, one simple explanation for suppressed volatility goes something like this (from a post earlier this month):

One burning question this year has been why volatility has remained so stubbornly low.

At a base level, this is kind of a silly question if you’re talking about the VIX. That is, January was the fifth calmest month on record as measured by realized vol and if low realized vol begets low implied vol, well then…

But one of the important things to note is the extent to which collapsing stock and sector correlations have contributed. And do you know what’s driven S&P correlation so low? Here’s a hint: the fact that there are clear winners and losers from the Trump agenda. Recall this from Goldman:

  • US stock correlations have plummeted, driven by falling correlation between sectors. S&P 500 average 3-month realized stock correlation hit 0.09 earlier this month, the lowest level since the mid-1990s. However, correlations within sectors have declined less than the correlations between sectors, reflecting the relatively “macro” potential consequences of the new administration’s proposed policies and recent economic acceleration as well as the investor use of ETFs to capture those dynamics.


And from SocGen:

  • From a technical perspective, index volatility is a function of not only average single-stock volatility, but also of how stocks within the S&P 500 are moving with respect to one another – a measure of correlation. When the correlation is low, most stocks move in different directions. With all these individual stock moves, there is no clear direction to the overall index, and this, in turn, dampens down volatility. The short term (three month) average pairwise correlation among the S&P 500 sectors touched its lowest level since 2002, while the 3m realised volatility reached its lowest level in the past 27 years and is in the 3rd percentile since 1928 (see charts below). The short-term implied volatility (as measured by the VIX) depends primarily on realised volatility. If realised volatility is low, and expected to remain low, especially because of the dampening effect from the low realised correlation among stocks, the short-term implied volatility is likely to remain subdued, as the cost of carrying long vol positions is too high, making sure implied vol converges towards realised.


But Crise takes a different approach – which is good because we were sick of repeating the narrative outlined above anyway – looking at the VIX versus the credit cycle for clues. That dovetails nicely with yesterday’s piece on credit card usage (the one linked above).

Below, find Crise’s latest in which he notes that in the simplest possible terms, the VIX is as low as it is “because it should be.”

Via Bloomberg

The credit cycle is the bedrock of macroeconomic trends. When credit is flowing and default rates are low, the economy and financial markets tend to perform well. As the cycle matures and credit quality deteriorates, the conditions fall into place for a recession and a bear market. And while there’s a lot of head-scratching over why the VIX is so low in the face of apparent uncertainty, it’s hard to argue that it’s too far out of whack when compared to credit spreads.

  • Of course, spreads themselves are a function of market perception that may or may not reflect current and future economic reality. VIX and spreads are both measures of current market risk appetite, so it is unsurprising that they convey the same message. What if we look at economic measures of credit and the cycle? Will they provide the same conclusion? I decided to find out.
  • I modeled the VIX using three simple macro inputs:
  • The 6-month moving average of the Chicago Fed National Activity Indicator as a proxy for the economic cycle
  • The U.S. credit card delinquency rate
  • The 1-year change in the U.S. nonfinancial corporation asset-to-liability ratio from the quarterly flow-of-funds data
  • Using such low- frequency data, we shouldn’t expect to derive a signal that captures the high-frequency amplitude of the VIX. Then again, that’s not what we’re interested in. The question we’re asking is “where should trend volatility be given the economic and credit cycle?” The answer appears to be “pretty low.”
  • Each of the model inputs has a coefficient pointing in the “correct” direction, and the output has done a pretty good job of capturing trends in the VIX over the past 15 years or so.
  • Interestingly, the model suggests that the VIX should be lower than it was in 2006, a year famous for its lack of volatility.
  • While the VIX is currently lower than the model reading, the magnitude of the difference is pretty modest in a historical context.
  • Until we see a deterioration in credit quality across the broad economy, we can probably put one burning question to bed. Why is the VIX so low? Because it should be.

VIX Futures Traders Finally Getting Complacent

By Tom McClellan

Highest priced VIX futures contract
February 17, 2017

The recent story about low readings for the spot VIX Index is well-reported.  What has escaped the attention of many is that prices are now finally coming down for VIX futures at the long end of the maturity spectrum.

The spot VIX has been below 15 for most of the time since July 2016, except for a brief spike up to 22.51 on the Friday before the November 8, 2016 federal elections.  Despite the spot VIX remaining low, the highest priced VIX futures contracts have been fairly steadily above 20. Usually the highest priced contracts are the farthest out expiration month contracts. Just recently, they started creeping lower, down into the 19s, then the 18s.

Something different is happening now.  The current far-month contract is Oct. 2017, which closed on Feb. 15 at 17.675. That is the lowest number for the highest VIX futures contract since August 2015, just before the China-fueled mini-crash.

This week’s chart shows a plot depicting the value of the highest priced VIX futures contract over time. The prices are inverted to better align with the price action.  Instances with the highest priced VIX futures contract being below 18 are pretty rare, and usually associated with meaningful tops.  That “rule” did not work during QE3, but it is fair to say that a lot of things did not work then.  The rule started working again after QE3 was ended.

You have probably heard of the several VIX related ETNs that are available now. Some folks do not know that those products are not actually tied to the spot VIX, but rather they own VIX futures, either long or short depending on the type of ETN.  A big winner this year is XIV, the short VIX futures ETN, which has more than doubled since the November elections.  XIV goes short the two VIX futures contracts nearest to expiration.  It has a nice upward bias because of the natural time-decay of VIX futures pricing.

Here is what that term structure looks like as of Feb. 16, 2017:

VIX futures curve

Continue reading VIX Futures Traders Finally Getting Complacent

VIX Well Below Its Futures Contracts

By Tom McCellan

VIX Well Below Its Futures Contracts

VIX spread from its highest priced futures contract
September 30, 2016

When there is a big disagreement between the value of the spot VIX Index and the prices of its futures contracts, that carries important information about trader sentiment.

As of the close on Sep. 28, 2016, the spot VIX was well below all of its futures contracts.  The chart above measures the spread between the spot VIX and the highest priced VIX futures contract, which is currently June 2017.  The direct message is that VIX futures traders do not think that VIX value in the 12s is likely to persist all the way until the futures expiration.  The image [below] shows a recent quote window.

VIX futures quoteWhen the spread gets this big, it can be a sign of excessively complacent trader sentiment about the near term risk picture.  The VIX Index is calculated based on the volatility premium that gets priced into SP500 Index options.  When traders are complacent, they drop the price of insurance, much like a homeowner’s insurance company reduces policy premiums in Florida when there have not been any hurricanes for a while.

A VIX futures contract, however, is priced based on whatever a trader is willing to accept to buy or sell that futures contract.  Since there is no physical product like in gold or corn futures, the VIX futures are settled for cash at the value of the spot VIX Index on contract expiration day.

If the VIX really were to stay in the 12s all the way until June 2017, then a futures trader who was short the June 2017 VIX futures contract could make a lot of money as prices eventually decay back down to meet the spot.  But the VIX tends to wander around a lot over a time span like that.

The chart above may not adequately portray the full context of the recent high spreads between spot and the highest futures contract, so here is a longer term look.

VIX spread from highest VIX futures contract

It is pretty rare to see the spread get up as high as it has recently, and when it does happen, there tends to be a meaningful selloff in stock prices in order to restore a healthy level of worry into the hearts of overly bullish speculators.  I expect to see the same outcome this time.

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Chart In Focus Archive

Stop Wasting Energy on the VIX

By Chris Ciovacco

  1. The VIX Fear Index is arguably the most over-analyzed tool on Wall Street regarding its real-world predictive powers relative to the long-term path of the stock market.
  2. The common argument is when the VIX spikes, it is indicative of rising fear, and thus stocks typically drop when the VIX rises.
  3. The VIX measures “expected near-term volatility”, which is quite a bit different than fear or long-term economic concerns
  4. Can stocks go up when the VIX rises significantly from low levels? You can decide for yourself after reviewing a historical example.

Sounding The Low VIX Sirens For Stocks

If you follow the markets regularly, you have probably run across similar passages to the one shown below from a May 28, 2014 MarketWatch article:

As the VIX continues to sink closer to its historic low of 9.39, many commentators are now discussing the VIX as a “complacency index.” As the VIX falls, it signals increasing levels of investor complacency. Because economist Hyman Minsky taught us that periods of high volatility follow periods of low volatility, many investors are beginning to worry that a “Minsky moment” could be lurking around the next corner that would send volatility higher, increase the risk premium for holding stocks and cause prices to sink.

We agree with portions of the quote above, with two exceptions: (1) when the VIX rises from low levels to higher levels, it does not necessarily mean the stocks are in big trouble, especially when viewed from a longer-term perspective, and (2) low VIX readings do not necessarily align with caution-oriented “complacency”.

Retail Sales Align Nicely With The VIX Story

Having worked on Wall Street for over 20 years, we can confidently state evidence is always available that logically aligns with the bearish narrative for risk-related assets; the same can be said for a bullish narrative. The bearish case got a nice dose of weak data on Thursday, September 15. From Bloomberg:

Sales at U.S. retailers dropped more than forecast in August, indicating a pause in recent consumer-spending strength that has carried the economy.
Purchases declined 0.3 percent from July, the first drop in five months, after a revised 0.1 percent advance in the previous month, Commerce Department figures showed Thursday in Washington. The median projection of economists surveyed by Bloomberg called for a 0.1 percent decline. Excluding cars, sales unexpectedly fell 0.1 percent.

Low VIX Means Trouble For Stocks, Right?

As recently as September 8, 2016, the VIX was hovering near the low end of its long-term range dating back to the 1990s. If that means historic complacency, then logic would tell us that when the VIX rises from very low levels, it must mean rising fear and bad times ahead for stocks…right? That logic often holds in the markets, meaning the VIX can be and is a useful tool for stock investors. However, the strength of a stock market indicator lies in its consistency.

Continue reading Stop Wasting Energy on the VIX

Stocks at Risk?

By Biiwii

This is as much a test post for the new site as it is a market commentary. is going to be primarily a guest site ( will be my main posting venue for public as well as premium content) featuring the usual cast (Ashton, Hoye, Saville and others I think have quality, typo free financial market content) plus other quality writers I may find along the way.

Anyway, let’s see how a chart of the VIX looks with the current site format.  I know how it looks for stock market players; it looks like they have unwound all of their apprehension from earlier in the year.