Tuesday, January 4, 2011

The Year in VIX and Volatility (2010)

One of everybody’s favorite charts from a year ago was the basis for Chart of the Week: The VIX and Volatility in 2009, in which I created a fairly concise annotated summary of the year in VIX and volatility.

For some reason, the same chart seemed harder to create for 2010, partly because the volatility triggers were less discrete and seemed to arrive in recurring waves, each time apparently posing a different size threat. The European sovereign debt crisis is a prime example of the waves of threats, as are the concerns about China’s ability to navigate the dual hazards of slowing growth and rising inflation. In the U.S., concerns about a double-dip recession waxed and waned, while investors scratched their heads wondering just how much to worry about the foreclosure crisis or events on the Korean peninsula.

On the volatility side, the highlights of 2010 included the ‘flash crash’ in May and an even bigger VIX spike (to 48.20) toward the end of the month as the European sovereign debt crisis threatened to snowball out of control, pushing the VIX to a higher close than at any point prior to the 2008 financial crisis.

Investors also struggled under the psychological weight of the Deepwater Horizon oil spill in the Gulf of Mexico, which imparted a sense of helplessness across the U.S. and helped to dampen any sort of optimism about the economy and perhaps even technological progress in general.

In spite of all this, stocks rallied impressively for the last four months of the year, due in part to a second round of quantitative easing on the part of the Fed.

The year saw record volumes in a number of VIX-related products and included new daily record volumes in VIX options (June 11), VIX futures (November 16) and the increasingly popular iPath S&P 500 VIX Short-Term Futures ETN, which most investors know by its ticker symbol, VXX (November 23).

Volatility made its mark as a peripheral asset class in 2010, with VIX-based ETNs, making it much easier for retail investors to make direct investments in volatility. My guess is that this development is just a beginning and 2011 could mark a watershed year in terms of recognizing of volatility as a mainstream asset class.

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[source: StockCharts.com]

Disclosure(s): short VXX at time of writing

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