Wednesday, May 18, 2016

Economic Data Surprise Index Shows Continued Weakness

Today we get another glimpse into the behind-the-scenes machinations of the “data dependent” Federal Open Market Committee (FOMC) with the release of the minutes from the April 26-27 meeting.

While the Fed has a dual mandate of maximum employment and price stability, lately there has been considerable discussion about the how much the Fed should let global considerations factor into Fed policy.  Clearly, the pace of economic growth in China or the stability of euro zone has a significant downstream effect on economic activity in the United States.  Additionally, with 48% of revenues from the S&P 500 companies coming from international markets, policy formulation in an increasingly interconnected global economy is becoming more complicated with each advance in technology, communications and logistics.

Given this backdrop, just how does the data look?  For the past seven years I have been publishing an economic data surprise index that aggregates U.S. economic data relative to consensus expectations across areas such as employment, the consumer, housing/construction, manufacturing and inflation.  The chart below aggregates data across all these areas and shows data peaking relative to expectations during October 2014.  Since that peak, however, economic data relative to expectations deteriorated sharply, falling to an all-time low during the middle of January 2016 that was matched again at the end of last month. 



[source(s):  VIX and More]

If the Fed is indeed data dependent, then there is no avoiding the conclusion that aggregate data relative to expectations has been a disaster for the past 1 ½ months.  There are some signs of stability forming in the current environment and clearly the strength of the dollar and the price of crude oil will have a great deal to say about economic data going forward.  Then again, international events such as the Brexit vote and the evolution of negative interest rate policies of central banks across the globe may trump all domestic U.S. economic data.

[Readers who are interested in more information on the component data included in this graphic and the methodology used are encouraged to check out the links below. For those seeking more details on the specific economic data releases which are part of my aggregate data calculations, check out Chart of the Week: The Year in Economic Data (2010).]


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Disclosure(s): none

Tuesday, May 17, 2016

Updated VIX ETP Landscape, Including VMAX and VMIN

Now that the recently launched REX VolMAXX Long VIX Weekly Futures Strategy ETF (VMAX) and REX VolMAXX Inverse VIX Weekly Futures Strategy ETF (VMIN) VIX exchange-traded products have started to achieve critical mass, I thought it would be a good time to update my VIX ETP landscape chart.

In the graphic below, I have plotted all of the VIX ETPs with respect to their target maturity (X-axis) and leverage (Y-axis). 


[source(s):  VIX and More]

The most interesting change in this chart is the addition of VMAX and VMIN, which are on track to trade over 100,000 as a pair today for the first time since their launch two weeks ago.  In deciding where to plot these two issues, I note that the 10-day historical volatility of VMAX and VMIN is approximately 30% higher than their more popular competitors, VXX and XIV.  As VMAX and VMIN are actively managed and do not have a fixed target maturity, I am electing to assume that based on the early history, the target maturity is in the 2-3 week range.  Additionally, while there is no leverage being used in the traditional sense, as is the case with UVXY, TVIX and TVIZ, so far the use of VIX weekly futures in addition to the standard monthly VIX futures means that VMAX and VMIN have a higher beta than VXX and XIV.  For this reason, I have also plotted VMAX and VMIN as having slightly higher "leverage" than the group of VIX ETPs that have a target maturity of thirty days, such as VXX, XIV, etc.

Frankly, I am a little surprised that VMAX and VMIN have not attracted more interest in the trading community, as these products have features that should be very attractive to short-term traders.  For now, the bid ask-spreads are typically in the 0.05 – 0.10 range, but as these tighten up, I expect volume and trading interest will ramp up quickly.

One necrology housekeeping note of interest:  Citibank has decided to redeem early its C-Tracks Exchange-Traded Notes Based on the Citi Volatility Index Total Return (CVOL).  The last day of trading for CVOL will be May 23, 2016, with cash payments to be made to investors on May 24, 2016.  The diagonal “X” through the ticker symbol in the chart indicates that this is the last time CVOL will appear on this graphic.

Finally, when one is trading VIX ETPs, it is always essential to consider the degree of contango (or backwardation) in the VIX futures, which can translate into substantial negative roll yield.  For the record, the current month is on track to have the third largest average negative roll yield for the month in the thirteen-year history of the VIX futures.  For those who may be interested, the top two months in terms of extreme negative roll yield were March 2012 and July 2004.

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Disclosure(s): net short VXX, VMAX, UVXY, TVIX and TVIZ; net long XIV, VMIN and ZIV at time of writing

[source(s):  VIX and More]

Monday, May 2, 2016

VMAX and VMIN Poised to Be Most Important VIX ETP Launch in Years

REX Shares is launching two new VIX exchange-traded products on Tuesday in what is likely to be the most important VIX ETP launch in several years.  The REX VolMAXX Long VIX Weekly Futures Strategy ETF (VMAX) is the long volatility product, while the REX VolMAXX Inverse VIX Weekly Futures Strategy ETF (VMIN) is the short volatility sibling.

The launch of these two products comes at a time when the VIX ETP space had become stale and had frustrated investors who have sought out products for both long and short volatility strategies when Every Single VIX ETP (Long and Short) Lost Money in 2015.

After a flurry of innovation in the VIX ETP space from 2009 to 2011, new product offerings have slowed to a trickle over the course of the past few years, with only the mystifying AccuShares VXUP and VXDN products making it out of the gate last year in a highly-anticipated May 18th launch that pivoted quickly from excitement to befuddlement, as investors were overwhelmed by the complexities associated with the seemingly endless flow of regular distributions, special distributions and corrective distributions.

VIX aficionados know that 2015 was also notable in that it marked the launch by the CBOE of VIX weekly futures on July 23rd and VIX weekly options on October 8th.  Both product launches were successful and it was just a matter of time before the new VIX weekly futures provided the foundation for a VIX ETP that was based on those futures.  While details are sketchy regarding VMAX and VMIN, they will be holding VIX weekly futures and will target a weighted-average VIX futures maturity that is less than thirty days.  These ETFs will be actively managed and it is likely that they will not have a fixed target maturity.  Theoretically, the target maturity could vary anywhere from five days to 29 days, though given the holdings and the “max” and “min” embedded in the ticker symbol, I would anticipate an aggressive target maturity on the order of 7-14 calendar days.

Whatever the target maturity, VMAX will be competing with VXX right from the outset, while VMIN will find itself up against the likes of XIV.  The competition trades approximately 100 million shares each day and is certainly vulnerable to new products that have a higher beta and should more closely track the spot/cash VIX on a daily basis.  Depending upon the target maturity of VMAX and VMIN, I would not be surprised if these products have 50% more beta than VXX and XIV.  For this reason, I would be shocked if, at the very minimum, VMAX and VMIN do not become darlings of the day-trading crowd – a forecast not unlike the one I made on November 14, 2008 in Prediction: Direxion Triple ETFs Will Revolutionize Day Trading.

Frankly, this space has been relatively inactive as of late and with VMAX and VMIN, I now have the perfect opportunity to dust off the cobwebs and spit out the analysis and opinions that once came in such machine-gun rapidity that readers came up some far-reaching possible explanations for why I was so prolific.

So…consider me back.  I’m rested, hungry and ready for some new – and old – subjects to tackle.

I’ve even managed to dig deep into the archives so that readers can easily refer to some of my musings on issues related to the above subjects.

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Disclosure(s): net short VXX and net long XIV at time of writing; CBOE is an advertiser on VIX and More

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