#$tvix

[daytradingcourses]

TVIX is showing a reversal here.  There are still some BEARS (sellers) in this market.  Watch yourself.  

[jeffhirsch]

Volatility begins to pick up

Exactly one week ago today, on July 26, the CBOE Volatility index (VIX) hit its lowest level ever in records dating back to 1990 at 8.84. Since then the VIX has been quietly ticking higher and finished today at 10.30. A late July low by VIX is consistent with its historical seasonal pattern displayed above in the lower pane (shaded yellow box). If VIX tracts its historical pattern going forward then increasing volatility from now until sometime in October can be expected.

[jeffhirsch]

VIX Seasonal Low Likely Set, Higher Volatility Expected

Last Wednesday, May 17, the market was walloped with the worst day of the year thus far. Prior to that day, VIX (CBOE Volatility Index) was at historic lows trading at less than 10 for four straight days and actually closed below 10 on May 8 & 9. VIX then slowly inched higher and closed at 10.65 on May 16. Today, VIX closed at 10.68. VIX and the broader market are essentially right back where they were one week ago, but it took four trading days to (nearly) recover that single day’s loss. 

VIX’s 46.4% jump on May 17 could be the first sign that the seasonal low in volatility has already been reached this year. In the following chart, VIX weekly bars appear on top with its 1-year seasonal pattern appearing on the bottom. In a typical year, VIX typically finds a bottom sometime from mid-April to mid-July before briskly rebounding higher through frequently turbulent August and September (since 1950, September is the worst month for S&P 500 and August is second worst based upon average percent change) to a peak in early October. From then until the following April, during the “Best Six Months,” VIX is generally in decline as the market is climbing higher. If VIX has reached its seasonal low for 2017, then more days like last Wednesday could be on their way.

[jlfmi]

Will Record Short VIX Position Backfire On Speculators?

Speculators (a.k.a., “dumb money”?) are holding their largest net-short position in the history of the VIX futures contract.

Every week, the CFTC releases their Commitment Of Traders (COT) report on the collective positioning among major futures players. Like most market data, the majority of the time, we do not find the COT report on a particular contract to be of much use. However, we do make it a habit to note any extremes in trader positioning as the data can be quite enlightening at such junctures. For example, this morning we released our Chart Of The Day on Twitter and Stocktwits noting the record net-short position among Speculators in VIX futures. This can be helpful since these Speculators are notoriously off-sides at extremes.

As a reminder, “Speculators” (e.g., hedge funds, commodity funds, etc.) typically exhibit trend-following behavior, i.e., they build positions in the direction of prices. Thus, in a trending market, they can be on the right side for an extended period. However, where they earned their “dumb money” moniker is at key inflections and turning points.  Again, that is because they’re often wrongly positioned at such times, and to an extreme.

In today’s example, we see these speculators held a collective net-short position of more than 134,000 VIX (S&P 500 1-month Volatility Index) contracts. That is a record amount going back to the inception of VIX futures in 2007. Therefore, it’s safe to say that speculators are fairly confident that stock volatility will remain low in the foreseeable future. Any time we see their confidence, and investment positioning, at an extreme, it raises our antenna.

Note that the Speculators’ previous record net-short position in VIX futures occurred in early September 2016, just days before the S&P 500 broke out of a historic trading range by dropping more than 2½% in a day – and the VIX soared by 70%. Again, these extremes can always get more extreme, and these speculators do not always receive their comeuppance in such short order. But it typically does come, eventually.

You might also note on the chart the massive expansion in interest in this contract around 2012. This was no doubt spurred by the proliferation in VIX-based exchange traded products. We must concede that the environment now may certainly be different in character and behavior than it was prior to the emerging popularity of these ETP’s. However, our anecdotal evidence is that the contrarian signals generated by extremes in VIX futures positioning have been more effective in recent years.

Speculators had better hope that’s not the case.

________

More from Dana Lyons, JLFMI and My401kPro.

The commentary included in this blog is provided for informational purposes only. It does not constitute a recommendation to invest in any specific investment product or service. Proper due diligence should be performed before investing in any investment vehicle. There is a risk of loss involved in all investments.

Will Record Short VIX Position Backfire On Speculators? was originally published on The Lyons Share

[jlfmi]

Stocks AND Volatility Indices Both Jump -- Who’s Right?

Today saw the VIX solidly higher despite the fact that stocks rallied hard; what do similar precedents tell us?

Markets have been on a parade of peculiarity since the presidential election a month ago. Today’s rally on Wall Street was no exception. Yesterday, we noted the 3-month low in the S&P 500 Volatility Index (VIX), and the historically bullish connotations for the rest of December. Today, the VIX pulled an about-face, despite the strength in stocks. Specifically, the VIX uncharacteristically jumped 3.5% even though the S&P 500 (SPX) was up more than 1%. We thought that was odd so we looked at the historical data. It turns out that it was.

Since the VIX’s inception in 1986, today marks just 30th time in which the VIX rose at least 3.5% on a day that the S&P 500 gained at least 1%. 22 of those days occurred with the SPX within 2% of a 52-week high, as was the case today.

So, who’s right -- stocks or volatility? Well, from a glance at the chart, there are a handful of glaring occurrences at cycle highs (e.g., August 1987, July 1990, March 2000). However, let’s look at the aggregate performance of the S&P 500 and the VIX following these 22 prior occurrence.

Prior precedents would suggest that the VIX is in the right here. The SPX saw median losses from 1 week to 3 months following previous occurrences, though median returns were never worse than -1.2%. The consistency of losses was the biggest offender, with almost 3/4 of the events showing losses after a month and 1/3 after 2 months. Whatever effect this scenario had on forward performance, it seems to be a short to intermediate-term one. By the 6-month mark, median returns turned positive and began a path toward “normal” returns.

As for the VIX, the opposite occurred (predictably, as the VIX tends to move counter to stocks, today’s events notwithstanding). The VIX showed median gains from 2 days out to 3 months. Its peak median gain came at the 2-month mark at +10%. VIX gains were pretty consistent as well, with about 2/3 of the dates showing a rising VIX over all durations, 2 days to 3 months. Again, by 6 months, the VIX seemed to settle down, posting a 1% median drop.

There are a lot of positive factors going for the stock market right now, not the least of which is price action. Therefore, we don’t want to make too much of this odd data point with its limited sample size. However, to the extent that this face-off between rising stocks and a rising VIX has any influence on future performance, historical precedents suggest it may be the stock market that blinks -- at least in the shorter-term.

_____________

More from Dana Lyons, JLFMI and My401kPro.

The commentary included in this blog is provided for informational purposes only. It does not constitute a recommendation to invest in any specific investment product or service. Proper due diligence should be performed before investing in any investment vehicle. There is a risk of loss involved in all investments.

[jlfmi]

Does This Signal Mean Smooth Sailing For Santa Rally?

The VIX just notched a 3-month low; previous early-December occurrences have been generous to stock investors.

With 2017 fast approaching, all matters of year-end and December stats will be flying around. We may well be contributors to that phenomenon, though we will certainly endeavor to share relevant content as opposed to the trivial. Why focus on December-specific stats anyway since it’s just another month? Well, undoubtedly, there are some dynamics pertaining to year-end that make the month unique indeed -- so we don’t have a problem with it. In fact, we’ll share a statistic today.

In past years, we’ve written several posts regarding December spikes in the S&P 500 Volatility Index (VIX). Our finding was that stocks had a tendency to do very well into year-end after such spikes in December. In fact, their record was perfect prior to the last few years. But that’s how markets work, i.e., once a phenomenon is identified, it gets exploited until it vanishes.

Today’s post looks at the opposite scenario. That is, what do stocks do after very subdued VIX readings in early December? Specifically, we looked at occasions when the VIX made a 3-month low, as it did today, during the first 18 days of December. While December has generally been a strong month, it has also not been immune to some adversity during the middle part of the month. Therefore, our expectation was that stocks had perhaps struggled following historical occurrences -- if not through year-end, at least intra-month. That has not been the case.

Since the inception of the VIX in 1986, today marked the 30th time that it hit a 3-month low during the first part of December. Of the prior 29, 27 showed a positive return in the S&P 500 from that date into year-end, with a median return of +0.95%. Even the median drawdown until year-end was very contained, at -0.23%, with just one date seeing a drawdown before year-end of more than -2%.

So, like VIX spikes in December, VIX drops have tended to work out well for investors as well. Maybe we should chalk up much of the success to December’s typical strength overall. Although, as we mentioned earlier, mid-month adversity has often plagued the month of December -- but not in this sample.

Again, one thing to keep in mind is that once such overwhelming tendencies are identified, they tend to get exploited away. Therefore, we can’t blindly assume that this track record will keep up. Additionally, if we place more weight on recent events, things become slightly less rosy. That’s because the last occurrence took place on 12/5/2014 and resulted in 1 of the 2 losses for the S&P 500 -- and the one drawdown greater than -2% (-4.9% to be exact).

All in all, however, the preponderance of evidence lies with the bulls. Far from leading to a mean-reversion spike in the VIX and drop in stocks, 3-month VIX lows in early December have almost unanimously brought about continued favorable market action through year-end. That would suggest that perhaps the Santa Claus Rally is set for smooth sailing.

_____________

More from Dana Lyons, JLFMI and My401kPro.

The commentary included in this blog is provided for informational purposes only. It does not constitute a recommendation to invest in any specific investment product or service. Proper due diligence should be performed before investing in any investment vehicle. There is a risk of loss involved in all investments.

[jlfmi]

Complacency Is Creeping Back Into The Stock Market

With stocks’ steady drift through all-time high territory, investors’ relative near-term volatility expectations have plummeted to near record lows.

One of the hallmarks of the post-February rally in stocks has been a healthy dose of investor skepticism and anxiety. But for brief periods, e.g., towards the end of April, investors have been slow to embrace the move. Such disbelief is one trait that has helped prolong the intermediate-term rally, now more than 5 months old. In recent weeks, we have mentioned in posts and interviews that perhaps the one thing that will usher in greater enthusiasm on the part of investors is a new high in the major averages. Perversely, that was one potential development, we surmised, that may shift sentiment far enough to the bullish side that it could finally place the intermediate-term rally in jeopardy. That scenario appears to be possibly playing out.

Why do we say that? Well, one piece of evidence suggesting a new-found elevated level of investor complacency comes from the volatility market. One way to judge investor comfort or anxiety is to look at the level of expected stock market volatility via instruments such as the S&P 500 Volatility Index, or VIX. Presently, the VIX is plumbing one of its lowest levels since 2007, so investors are displaying very low expectations for stock market volatility at the moment.

Another way of using volatility to measure the extent of investor nervousness is by comparing near-term volatility expectations versus those farther out. For example, the VIX is actually the 1-month volatility index. Meanwhile, the VXV is the 3-month volatility index. Typically, the VIX will be lower than the VXV as there is less time in the near-term for volatility rises to occur. When investors get especially nervous (usually during a selloff), near-term volatility expectations can actually rise above those farther out, i.e., the VIX/VXV ratio rises above 1.00, or 100%. Conversely, during times of complacency, the VIX can drop to relatively low levels versus the VXV, historically under 0.80, or 80%. That’s where the VIX/VXV ratio currently finds itself -- and then some.

As of yesterday, July 19, the ratio stood at 76.0%, one of the most complacent readings since the inception of the VXV in 2007.

As the chart reveals, this was just the 14th reading under 77.9% since 2007 (with none coming prior to 2012). The previous occurrences were clustered in March and August of 2012 and December 5, 2014. So how did investors fare following such extreme displays of complacency? As you may have guessed, the complacency was not well-timed.

Here is the S&P 500′s performance following the previous 13 days showing a VIX/VXV reading under 77.9%:

As you can see, in the short-term, there was little edge as returns in the S&P 500 were a toss-up. Therefore, while complacency may not be advised at this juncture in the market, perhaps there is no reason to panic either. After the short-term, however, things get interesting.

At the 3 month mark, all 13 events were negative, with a median return of -3.9%. Perhaps that is the time frame in which to expect some market drawdowns. The 6-month and 1-year results, however, would suggest that short sellers best not overstay their posture. That’s because all 13 events would reverse their losses and show positive returns over those 2 time frames.

We’ll remind you that the 13 precedents were clustered around just 3 periods. Therefore, the sample size is even smaller than “13″ would suggest. However, unanimous is always an intriguing result so we would not necessarily dismiss either the intermediate-term weakness nor the longer-term strength.

Is this data point enough to override the constructive, post-breakout price structure in the S&P 500? We’d say, no. Is it enough to counteract ongoing positive breadth conditions? No, again. However, we will say that this measure of investor complacency is enough, in the intermediate-term, to at least remove sentiment from the “tailwind” category for stocks.

_____________

More from Dana Lyons, JLFMI and My401kPro.

The commentary included in this blog is provided for informational purposes only. It does not constitute a recommendation to invest in any specific investment product or service. Proper due diligence should be performed before investing in any investment vehicle. There is a risk of loss involved in all investments.

[valuewalkposts]

Kolanovic Notes Brexit Similarities To August 2015 Crash

By Mark Melin   Sign Up For Our Free Newsletter and receive in-depth ebooks on famous investors      

JPMorgan’s quant master Marco Kolanovic looks at the stock Brexit crash and rebound and sees similarities with the August 2015 version. In a June 30 report emailed to clients and reviewed by ValueWalk, he says the Brexit vote was “largely a repeat of August ’15” and warns of risks ahead.

Kolanovic Thinks Oil Rally Ahead, Tempers Bear Call On CNBC ...

Kolanovic: Brexit crash similar to August 2015

Kolanovic, in Thursday’s report, looks at the recent Brexit market crash and rebound and notes a high degree of consistency with the August 15 version of the market crash.

During both market crashes, overnight stock futures markets witnessed morning limit down moves on crash day. During the two crashes, the ultimate daily losses were similar: -3.9% on 8/24 vs. -3.6% on 6/24. After the initial crash, the following day’s move was lower “driven by flows from convex strategies (e.g. CTA outflows, derivatives hedging).” Kolanovic also notes that after the August event, the subsequent rebound lasted three to four days, from the August 25 bottom to the August 28 top.

Separately, to date the Brexit rally has lasted three days, with Friday being the forth.

Volatility and surprise significant difference between Brexit crash and August version

Kolanovic Provides Hedging Advice To Risk Parity, Vol Targeting ...

One major difference between the two crashes was volatility and surprise. The August 2015 crash was unexpected as evidenced by the CBOE VIX index near 13, Kolanovic noted. After the crash, volatility as measured by the VIX spiked to near 40, reflecting surprise.

During the Brexit crash, separate algorithmic market observers were expecting a 29 to 40 VIX value range to signal for a mean reversion opportunity.

“The Brexit risk was fairly anticipated with significant buying of VIX products (e.g. VIX ETP exposure reached near record levels in the weeks before the event). As a result, the VIX moved to ~19 in the week before Brexit and increased only to ~26 on the event,” Kolanovic observed.

Kolanovic: Highs in volatility and lows in stocks have not been put in

Kolanovic, for his part, says the Brexit VIX highs have yet to have been put in, an ominous forecast.

Algo Exhaustion Among Hedge Funds Say Prime Brokers

We maintain the view that we have not yet seen the highs of VIX due to Brexit and related risks (increase of market realized volatility, upcoming earnings season, and geopolitical consequences including post Brexit shift in US election polls).

Kolanovic previously said the US would be in for a “Trump shock” as the US presidential race would at some point take center stage in market activity.

Kolanovic takes on other analysts

Kolanovic may have been hearing footsteps from other algorithmic and derivatives market analysts lately, and he wants to set the record straight.

“In the past few days we have heard various arguments how market action this week was substantially different from August ’15,” he wrote. “This was argued based on the perception of lower volume orderly move, market bouncing back (which was identical in August), and supposed pension fund inflows that propped up the market this time around.”

Kolanovic tackles these points one by one.

Total share volumes were higher During the Brexit, but only slightly with 18.6 billion shares traded compared with 18.3 billion during the August crash. Stock futures volumes on 6/24 were the highest since 8/24, again relatively the same, as during both August and June crashes futures bumped their 5% limit down pre-market and at the end-of-day absolute moves were of similar size, he notes.

JPMorgan Says CTAs Can Push Stocks Even Higher

For Kolanovic, the move is logical. “The fact that the 6/24 move was not larger than 8/24 move can be largely attributed to the lower S&P 500 option gamma imbalance as compared to 8/24 (over the 6/24 move gamma imbalance averaged ~15bn per 1%, vs. ~30bn for the 8/24 move…”

Regarding pension inflows, Kolanovic disputes these “wild estimates.” He says pension inflows had only a moderate impact. “In the order of importance, in our view the drivers of the mid-week rally were: the snap-back of oversold (European) markets and short S&P 500 gamma squeeze, and then the lesser drivers of S&P 500 price momentum turning neutral (from negative), month-end-effect, unwind of hedges and short covering.”

The true value of an algorithmic analysis can be found is the accuracy of their investable / tradeable forward looking market projections. From this perspective, Kolanovic has no doubt delivered value. Ultimately, he thinks the markets face elevated risk in the days and weeks ahead.

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[Photo Credit: Clayton Shonkwiler , Flickr]