August 13, 2017
The stock market’s quick selloff on August 10, 2017 came as traders got reintroduced to the concept of “event risk” after a long period of extreme quiet. And like bad drivers during the first snowfall of winter, there was a lot of relearning going on about how the market works.
The CBOE Volatility Index VIX shot up to 16.04, after having closed below 10 just 3 days before. And that led ETF traders to go wild with all of the VIX-related products. VXX is perhaps the best known of these, and it is not actually an ETF but rather an “exchange traded note” or ETN. The difference is meaningless for traders and investors.
This week’s chart shows the daily trading volume in VXX with an important adjustment. Because VXX’s price is in a long term downtrend, its number of shares outstanding has to rise to keep up and represent the same dollar amount of exposure. As a result, volume also trends higher as prices trend lower. Adjusting volume to show it as a percentage of shares outstanding helps to cancel out this effect. And it allows us to better see when trading volume goes to a high or a low extreme.
By this measure, the volume on Aug. 10, 2017 was the third highest of the year, and high enough to serve as a useful marker of a short term price low. Putting it more simply, when short term sentiment reaches a fever pitch, driving up the volume in VXX, it tells us that there has been a washout of trader fears, and so prices can start to bounce.
Extremely low trading volume can also be a marker of price tops, although it is not quite as reliable. One also has to at least mentally factor out whether a low volume day might be explained by holiday light trading around Christmas, for example.
You can track VXX volume easily anywhere. Tracking shares outstanding is a little bit harder, but it is available on several data platforms under the symbol $VXX.SO, where the .SO suffix stands for “shares outstanding”. Check with your data provider to see if they make it available.
This indicator is one that we watch carefully, but only show infrequently in our Daily Edition and twice monthly McClellan Market Report because its signals are so infrequent. But when they do appear, they are worth paying attention to.
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|Jul 27, 2017
How VIX Ends A Long Run of Low Values
|Jun 15, 2017
Correlation Between VIX and SP500
|Feb 17, 2017
VIX Futures Traders Finally Getting Complacent