Saturday Review For Mar 12, 2022

Professionally, I split duties between EQDerivatives and the Kelley School of Business at Indiana University. The people I interact with through my EQDerivatives affiliation are among the smartest derivative and volatility traders in the world. At Kelley, the graduate classes I teach expose me to very intelligent people as well. However, the Kelley students are experts in their own respective disciplines. The result is that I often field questions about the markets and specifically VIX. This past week one of my students asked me about using VIX as an indicator for trading the equity market. In response to that I discussed the relationship between VIX and VIX3M. VIX is a 30-day measure of expected volatility and VIX3M is similar, but using a 3-month timeframe. This week the relationship between VIX and VIX3M shifted from VIX at a premium to VIX3M to finishing the week at a discount (see below).

When VIX is at a premium to VIX3M many market observers consider this a sign of short-term market panic or concern. Typically the longer dated VIX3M closes at a premium to VIX. In fact, from 2015 through the present, VIX3M finished at a premium to VIX 90% of trading days, in 2022 this figure comes in at about 85%.

A quick comparison of the first chart to the one below shows the power of combining the two volatility indices to the S&P 500 price action last week. Note the reversal in the S&P 500 appears to coincide with a reversal in volatility indices in the first chart along with VIX3M crossing above VIX and remaining there for the remaining of the week.

 

For the week, all but one US equity and volatility index was lower. The sole winner, if you want to call it that, was VOLQ gaining a bit as the Nasdaq-100 lost a bit more than the S&P 500 and Russell 2000 last week.

Finally, sticking with the theme of VIX as a market indicator, I was on VolViews this past Friday. One of the topics we discussed was VIX over 30 for multiple consecutive days and how to interpret this elevated state of volatility. I ran some quick numbers and figured out that the current VIX over 30 streak of 10 days ranks high relative to history (table below).

After figuring this out I came across a tweet from Bill Luby, a very smart VIX follower, noted that anytime VIX has remained above 30 for more than five consecutive days, once it closes below 30, the S&P 500 has outperformed over several time periods.  Needless to say, we’ll be looking at the VIX close for that move below 30.