Yesterday's action drastically decreased the premiums (price between VIX futures and the spot VIX became less negative) on all VIX futures while the front month (March VIX futures) flirted with "backwardation " with VIX intra day. This is a VERY bullish move for VIX/VXX in a normal market. However, again, I don't believe we are in Kansas any more so we will most likely have to wait for yet another confirmation from the market itself to make any meaningful judgment on that action. Again, for the sake of keeping the convention consistent, I will change my Long Term Sentiment Disclosure from "Strong Sell " to "Sell " with an "*" which denotes the extra caution for now. (Please note that this LTSD can and will change very quickly due to the day's market activities -- it is a lagging confirmation rather than a leading indicator.)
Tuesday's action – at least in direction, if not the magnitude – was somewhat expected and even anticipated by the market coming from the backdrop of the escalating Libya situation which may also trigger even more hostile and uncertain outlook for the region. This action coming on the heels of last week's market option and futures contract expiration added proper fuel and air mixture for a volatile session.
Before we make up our minds about the market – which I generally don't recommend – it is very intriguing to dissect some numbers for additional perspective. During Tuesday's session, VIX went up and closed 26.6% higher. According to the publicly disseminated data freely available, VIX had a total of 18 times since 1/3/1990 that it went higher by 26.59% or better. Since there were a total of 5327 trading days since 1/3/1990; that means the chance of VIX shooting higher than 26.59% from the previous day's close is a mere 18/5327 or just 0.3379%.
This is statistically a VERY low number indeed. Put in another way; VIX likely goes above Tuesday's move once every five to six quarters at a time. So Tuesday's action in VIX was something we don't expect to see very often for sure. With such a statistically low probability of happening, it will also be interesting to see what happens to VIX right after the day it shoots up 26.59% or better, five trading days (a week) later and finally 10 trading days (2 weeks) later. It will also be interesting to see whether this spike is meaningful as a leading indicator of a strong bull move in VIX. I did the work and below are the findings. One might find it very intriguing indeed.
Table 1. What happened to VIX the day after it shot up at least 26.59% or better.
Down | Up | Unchanged (Less than 10% of the previous day's change) |
13 | 2 | 3 |
72.22% | 11.11% | 16.66% |
So more than seven times of 10, VIX heads up and closes lower the very next trading day after it made a 26.59% move or higher. This seems somewhat logical considering just how mean reverting VIX really is. Let's take a look at next one. Only one out of 10 times, has VIX continued its move up to the next day.
Table 2. What happened to VIX the week (five trading days) after it shot up at least 26.59% or better
Down | Up | Unchanged (Less than 10% difference between the close of this day and the "shoot up " day's close) |
7 | 3 | 8 |
38.88% | 16.66% | 44.44% |
This is somewhat more surprising. After VIX shoots up at least 26.59%, it seems to indicate either unchanged stance in VIX or down trend in VIX after one week time period. Only 16.66% of the time it foretold the continuing the uptrend.
Again, let's take a look what happened to VIX after two weeks.
Table 3. What happened to VIX two weeks (10 trading days) after it shot up at least 26.59% or better
Down | Up | Unchanged (Less than 10% difference between the close of this day and the "shoot up " day's close) |
8 | 6 | 4 |
44.44% | 33.33% | 22.22% |
Again, the findings are quite counter intuitive. Only 33.33% of time, it seemed to have foretold the upcoming uptrend in VIX.
Obviously, it's worth noting that with a sample size of just 18 times in over 21 years, it hardly makes sense to call these findings statistically meaningful. However, it does shine some additional light to Tuesday's action in VIX and allow us to have different perspective in today's market.
Finally, there seem to be NO apparent relationship between the times when VIX ended up higher next day (two time out of 18) and up trend that came by in two weeks time (six out of 18). In fact, some of the trends actually got bearish first before turning back up to get more bullish . Furthermore, I fail to see any meaningful correlation between VIX's one day spike (often that's what it is, one day spike) and the overall longer term trend. Yes, even when VIX was trading in historically low range of between 10 and 20, these spike days seem to have very little forecasting value for a meaningful VIX trend upward.
So the bottom line for today will be to watch for the close of VIX along with relative price changes between VIX and all the other VIX futures contract.
With the Tuesday's action, I would like to confirm the long anticipated convergence has come to fruition. And it has taken place with the most likely scenario of #1. (Please refer to yesterday's post for more detail of this phenomenon).
Along with the unusually high (in relative terms) VIX shoot up, both DJIA and SP500 (SPY) took a breather as well as the XLF and KBE. Again, it is too early – as shown with VIX tables above – to call the bull market over. We need to wait for further confirmation. The rest of this shortened week will play a pivotal role in confirming whether the current bull run has another leg to go or not; more reason why every investor should pay close attention to his/her money management strategies before implementing any and ALL investment strategies. Correctly and prudently planned portfolios should have not much difficulty navigating through this and other turbulence which are sure to come in the market.
VXX has closed up (Correction! Yesterday's post states VXX closed down straight for four days as of Friday. It should actually read VXX closed up straight for four days as of Friday. My apology.) straight for five days in a row as of Tuesday. Again, VXX has never closed up seven days in a row since its inception in January of 2009. There's always the first time for everything, so we shall stand and watch.
Tuesday's MRP (Minimum Reversal Price) for VIX was 23.80 and that's just 14.42% above the same day's VIX close price of 20.80. A very low figure in historical perspective. Since it fell below my worry threshold of 20%, I will be extra cautious with my stances for now.
2/11/11 Strong Sell – The premiums got more negative and there's a sign that confirmation to the market up move for several months have happened. Watch out for the monthly contract expiration divergences between VIX and VXX
2/14/11 Sell – The premiums got less negative and there's divergence between VIX and VXX. As we enter monthly VIX futures expiration window, there is likely more turbulence and sense of uncertainty in the market. Political/Economical back drop also adds more to this scenario. Short term trading opportunities may arise allowing nimble traders to benefit both directions.
2/15/11 Sell – The premiums got less negative again. We are waiting for the confirmation of the divergence moves from Feb. 14. Short term trading opportunities may emerge and disappear very quickly as we move through the February VIX futures expiration week.
2/16/11 Sell – Basically the same, except the February VIX futures contract is off the board. We are still waiting for meaningful confirmation of the divergence which happened on Monday. It is still possible that the Tuesday's action was indeed the convergence; both days' actions were very weak. Short term churning action in the market continues.
2/17/11 Strong Sell – The premiums got more negative as the February VIX roll off completes. Convergence seemed to be confirmed as well. Still looking for short term churning action in the market to continue at least until the end of trading day. Might be a good time for short term intraday tradings.
2/18/11 Strong Sell – The premiums got more negative. There is still additional sign of divergence between VIX and VXX, we may have to wait for another convergence in the market. This may also create additional short term turbulence which maybe good opportunity for shorter term traders. Decision time maybe at hand.
2/22/11 Sell - Sell with caution ), the market action of 2/23/11 will be very important for VIX/VXX. If VIX manages to close UP again (up by more than 10% of 26.6% move or 2.6%) above 21.35 or so, it will be statistically VERY significant at least for very short term. It still won't be enough to alert all clear for VIX/VXX bulls and the market bears to go all in though.
Disclosure: I am short VXX.
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