The VIX, How Low Can it Go?

The VIX, How Low Can it Go?

#VIX #fear

$VXX

The Wall Street warriors have gone from cautioning over high volatility to fearing bets on stock swings are falling too Fasst.

Strategists at Evercore ISI Tuesday joined calls last wk from their counterparts on The Street who said it is time to close bets that price moves for the largest US companies will keep falling.

The rationale: hospitalizations in the US are reaching record high marks, while the Cboe VIX Index, the fear gauge, has already dropped to its lowest marks since August. Betting on lower volatility at this point may not be worth the risk, they say.

Still lots of fund managers see the fall in the VIX is good reason to be Bullish.

Volatility-control strategies, a type of systematic investing strategy, could shovel between $25 and $32-B into stocks over the next 3 months, according to BNP Paribas SA.

Bets on subsiding price swings in the S&P 500 populated the market late last month, when volatility hung at 40 and anxiety about a contested election ran high. The next 2 wks amounted to half a year’s worth of developments, between the election contention, a breakthrough on a COVID vaccine and a reporting season that showed earnings contraction of about a 33% of what had been expected.

The VXX (NYSEARCA:VXX) is Bearish across the board, no support and heavy overhead resistance at 20.03 and above.

That stuff prompted a 13-pt drop in volatility over 7 trading days, a move that leaves the index well above its 5 yr average, perhaps in consideration that the vaccine news will not help with a spike in cases happening now.

The markets are cheering the vaccine news, but there are a number of uncertainty investors are facing in the near-term. This can be a good opportunity to close the trade.

A broader look at the contour of the VIX futures curve offers another reason exit the short volatility trade.

When traders put out bets on subsiding swings last month, the curve was nearly the most inverted it had been in decades, meaning traders expected soaring near-term volatility and a steep decline later.

Anywhere I look on the futures curve now, the dots are hanging at or near 25. In other words, volatility is expected to stay at the same mark later in November and 8 months from now. That is about where the VIX Index closed Tuesday.

So far Wednesday, markets are not cooperating with the calls to exit a short volatility trade, with the VIX trading lower and stocks higher across the board, following gains in Europe’s Stoxx 600 Index and defying a fall in most of Asia.

Stay tuned…

Have a healthy day, Keep the Faith!

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Paul Ebeling

Paul A. Ebeling, a polymath, excels, in diverse fields of knowledge Including Pattern Recognition Analysis in Equities, Commodities and Foreign Exchange, and he it the author of "The Red Roadmaster's Technical Report on the US Major Market Indices, a highly regarded, weekly financial market commentary. He is a philosopher, issuing insights on a wide range of subjects to over a million cohorts. An international audience of opinion makers, business leaders, and global organizations recognize Ebeling as an expert.