Stocks ended the week in an ugly fashion with the SPX down about 1.25%. There was enough in the bad sentiment train with Greece, Euro Area deflation, poor GDP and Russia annexing another part of the Ukraine. Not the stuff of rising markets with earnings only tepid this season. So far most companies that are reporting are doing better than estimates. Not 80% to blow it out but just ok.
In Tuesday's webinar Options for Stock Traders I discussed how I can use VIX to spot intraday trends. One of the strongest signals for a reversal is when the market is hitting new lows, but the VIX is failing to hit new highs and/or is actually declining in price. We saw a clear example of that this morning. The chart below shows a tick chart of SPX and VIX on the day.
Stock got pasted again today despite the good consumer confidence numbers and retail sales. Oil prices are going even lower and that should be good for the consumer too. The retail index is holding up pretty well despite the 1.5% selloff into the close. What has gotten the VIX futures in such a funk?
By the end of the day VIX cash has shot way up as players are avoiding the risk on the weekend. Maybe there is not a budget bill and folks are nervous. Something is definitely afoot. Maybe the oil drop is too much of a good thing?
Over the last 3 months both VIX and VXX are actually up (albeit slightly for both). You know what is not up on the year, UVXY and TVIX. The combo of levering and contango make the product pretty great in a market where the VIX is exploding (see mid October) but pretty awful the rest of the time
Generally speaking, when the VIX is high, its a sale and when its low, its also a sale. However, there is one time where the expected pay out of selling VIX futures or options is not that great, when the VIX curve starts to do this:
The market had its biggest drop in months. It below through the 50 DMA, and if things keep going it could threaten the 100 DMA if things keep going. Today, on CNBC I am sure the anchors are panicked. Yet, the VIX was up less than 3 points at the end of the day, despite the SPX closing on the lows. Why? Take a look at this chart of the SPX, 30 day IV and 20 day HV.
With 4 ½ weeks to go in the VIX Aug cycle, there is not a lot of enthusiasm for the August VIX future. Is it cash too high or futures too low or just a combination of them both? There was an average mark up in VIX due to the weekend but not much more than that. Stocks sold off but really did not have a lot of gas to keep going down.
Just about every source has written about how, the VXX is what we thought it was: a good way to day trade volatility and a terrible vehicle for tracking the VIX. We have written about it multiple times. , Bill at VIXandMore has, Jared at Condor Options has, actually just about everyone has. However, very rarely do we get such a clear example of how the ETN fails as a multi-day VIX tracker than we saw over the last two days. Take a look at this chart: