Tuesday, March 17, 2009

VXX Sets New Volume Record for Fourth Consecutive Day

When it was first launched, VXX, the short-term (one month) VIX ETN, was an immediate success, at least as judged by the volume of trading, which exceeded 100,000 in each of the first eight sessions. Interest in VXX seemed to wane for awhile, then suddenly surged last Wednesday, as I reported in VXX Sets New Volume Record.

Volume in VXX has only increased since last Wednesday. After today’s 531,234 share day, VXX now can claim four consecutive days of new volume records, surpassing the old record (dotted green line) that was established on the second day of trading.

Following last Wednesday’s record volume, I opined:

“I suspect that VXX trading volume will prove to be a meaningful sentiment indicator with the passage of time. Volume climaxes should provide some insight into the mindset of the retail trader and provide some contrarian signals at sentiment extremes.”

I have no way of knowing whether the recent surge in volume is the result of bearish directional plays (i.e., bearish on stocks, bullish on volatility) on increased hedging activity. My hunch continues to be that the bulk of VXX trading is largely directional speculation and may provide to be a contrarian signal. They again, VXX traders may ultimately prove to be part of the smart money crowd.

I will keep an eye on this story and provide additional updates as appropriate.

[source: StockCharts]

6 comments:

BUY ON THE DIP said...

Great post/site.

I feel more confident in your VIX and VXX analysis than my own. cheers to VIXation!

your site is a great resource and time saver.

Thank you.

TPC said...

Bill,

What did you think of that action today? Looked like people were picking up some protection. The VIX was up well before the market tanked.

Any thoughts?

Bill Luby said...

Thanks, BOTD. I appreciate it.

TPC, I thought the VIX did exactly what it should do on a typical Monday.

The key statistic to remember is that the VIX averages a jump of about 1.6% on Mondays that is due entirely to 'calendar reversion' as SPX options are repriced to bring the trading week into alignment with the calendar week. Thus...if the SPX were flat on a Monday, I would expect the VIX to be up 1.6%.

Today, the SPX was down 0.35%. Using a shorthand of the VIX = (-4.2)*SPX, you would expect the VIX to have jumped about 1.67% on a typical weekday. Add in the 1.6% Monday 'calendar reversion' factor and I would predict a VIX gain of about 3.27%. Today's change in the VIX: 3.26%.

Earlier in the day, when both the VIX and the SPX were up, some were a bit befuddled by the elevated VIX, but this was mostly the result of the same 1.6% Monday repricing.

FWIW, there is a similar phenomenon of the VIX falling on Fridays for the same (opposite) reason that the VIX tends to rise on Mondays.

This sounds like a good topic for a future post.

Cheers -- and thanks for the question,

-Bill

stonebat said...

surge in vix volumes can be interpreted as either bullish or bearish sentiment. sometimes it leads the market direction, or sometimes it is used as a hedging as new long position is being built. im betting on the latter case this time.

Eric said...

I think I weighed in here a week or two ago, but I tend to agree with the last comment. We are getting to the point where a lot of sectors look to have bottomed. I know Alcoa dropped 8% today, but it should've dropped a lot more given the news, and is still 10-15% above its 52 wk lows. If Bernanke can get credit flowing (still the biggest risk), this market should move up in steps. I think people are buying protection in order to get long.
Long GLL, DIG, GD, CINF, NAT, INTC Calls, ADBE Calls and just got long AA (this one could give me some heartburn).

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