#vxx

@keken_0406:

2020. 12. 1. Tue.

충성.

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2020. 12. 1. Tue.

Salute.

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I’ve had a great response to my Dow Award paper, Forecasting a Volatility Tsunami, with it being downloaded over 3,000 times since April. I really appreciate the support and the positive feedback I’ve received so far. Last week I had the opportunity to do a webcast with the Market Technicians Association, going into much greater detail about the importance of risk management and shedding some more light on the topic of the paper – low levels of dispersion within the VIX.

What I’m seeing today As of June 16th (last Friday), the dispersion within the Volatility Index (VIX) (i.e. a measure of daily gyrations in price) has fallen below the threshold I highlighted in my paper. As I mentioned in my webcast and in the paper itself, I do not believe this ‘trigger’ alone is enough to generate a final conclusion on the potential direction of the VIX and that in my own research I combine it with several other pieces of data. For example, low levels of dispersion in the Volatility Index act as signs of clouds forming in the sky and a sign that it could potentially rain (or the VIX could potentially spike higher) but it’s not a guarantee…as nothing ever is. Just like being able to have dark clouds in the sky without rain, we’ve had periods of time where dispersion has been low for the VIX without it being followed by a spike higher.

While last Friday sent the standard deviation for the VIX to a very low-level, paired with some over factors I follow, sent up a yellow flag for volatility in my opinion. Below is chart of the VIX close with previous instances of what I’m seeing taking place right now. Since 2012 we’ve seen this type of trigger occur before several intermediate and large swings within the VIX as well as at the end of 2010.  Most recently we saw three instances in August of last year before the Volatility Index rose over 70% and major U.S. indices weakened for several weeks.

Seasonality I find it extremely interesting that this is occurring near the end of June, as based on seasonality, that has been when the Volatility Index has historically bottomed out. Thanks to Callum Thomas for the below chart, which he included in his weekly ‘chart storm’ over the weekend, showing the seasonal patterns for the S&P 500 and the VIX Index since 1990.

This post is not meant to act as a recommendation to buy or sell securities but to show an example of how I have incorporated volatility dispersion within my own research. We’ll see what the VIX does in the coming weeks.

After seven full trading sessions, this August has been rather sanguine when compared to historical average performance for the full month. Major indexes continue to trade at or near new all-time highs and the VIX index has been drifting lower rather quietly. Historically, the VIX has typically hit its annual low sometime during the month of July. So far in 2021, the VIX’s closing low was on July 2 at 15.07. This VIX seasonal low can be seen in the chart above just ahead of a seasonal climb to a peak that has generally arrived sometime during the month of October before declining again as the typical fourth quarter rally gains traction. VIX’s spike in March of 2020 is also visible in the above chart, pushing the late Q1 peak higher.

Digging deeper into VIX’s historical tendencies in August we present the following table comparing the change in VIX in August to the performance of the S&P 500 in August since 1990. S&P 500 has been higher 54.8% of the time over the last 31 years, but its average performance in August has been a loss of 0.6%. VIX, as one would likely expect has risen 61.3% of the time in August with an average increase of 9.4%. Shaded in the table are the Augusts where VIX (on a closing basis) was up over double digits. Every double-digit VIX gain in August was accompanied by a S&P 500 loss averaging 5.8%.