| | | Options Guru Says VIX Looks Poised To Pop, Sees ‘Volatility Overshoot’
March 21, 2016, 12:36 P.M. ET
by Chris DieterichLots of market-watchers are talking about the recent plunge in the CBOE Volatility Index (VIX).
The VIX, an options-based measure of market expectations for future price swings in the S&P 500, just had its sharpest 25-day decline on record, says MKM Partners’ derivatives strategist,Jim Strugger. The VIX fell from 28 on Feb. 11 to 14 last week. The decline means that demand for short-term options protection fell fast while U.S. stocks roared higher.
Is a plunging VIX an all-clear signal for stocks? Not quite. Just as analysts struggle to find meaning in the S&P 500's swift, double-digit rebound since early last month, so too are VIX watchers wrestling with the meaning of the drop in the market’s “fear gauge.” As noted earlier, Katie Stockton at BTIG sees the slump in the VIX as a worrisome sign that the rebound rally could be nearing an end.
Strugger agrees. He says the recent VIX slide looks like a “volatility overshoot.” He explains:
“Given the pace of decline in volatility … it seems that an absolute trough may be in place or near. That suggests elevated risk for U.S. equities following a 12% rally from the early February low and means it is time to reduce net long exposure. We will circle back on recommendations for hedges and long volatility exposure over the next few days.”
Fund flows in exchange-traded instruments that track VIX futures are in agreement. Since Feb. 11 (the day that stocks bottomed), nearly $450 million has flowed into the Barclays iPath S&P 500 VIX Short-Term Futures exchange-traded note ( VXX), which generally rises and falls together with VIX. Some $710 million has gone into the ProShares Ultra Vix Short-Term Futures ETF ( UVXY) and another $111 million into the VelocityShares Daily 2x VIX Short Term ETN ( TVIX).
Meanwhile, nearly $300 million has moved out of the VelocityShares Daily Inverse VIX Short-Term ETN ( XIV). This one rises when the VIX falls and vice versa. All data from ETF.com.
In short, traders appear to be positioning for a rise in volatility, rather than a decline
(editorial note I also believe that volatility will rise and the next move is likely to be to the downside. We have seen the Key focal leaders of Crude roll over from it's Feb 11th rally off of $26.05 low , The RUT and the NDX ( Nasday 100) index all look like they are rolling over.)
http://blogs.barrons.com/focusonfunds/2016/03/21/options-guru-says-vix-looks-poise-to-pop-sees-volatility-overshoot/?mod=yahoobarrons&ru=yahoo
John
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