Monday, December 31, 2012

Top Posts of 2012

Every year I tabulate the most-read posts in this space as I find this exercise to be an excellent way to identify the issues that readers are interested in and also to see how these issues evolve over time. These most-read posts also serve as easily accessible repositories of high-quality material for the benefit of new readers and long-term readers alike.

While 2012 was a slow year for the VIX (the first time the VIX didn’t make it into the 30s since 2007), it proved to be an exciting time for the broader volatility products space. Looking just at the titles of the top 25 posts below, an astonishing 9 of them reference TVIX or UVXY in the title, reflecting strong reader interest in the +2x volatility products that I called “day trading rocket fuel” back in January 2011.

The posts below represent those that have been read by the highest number of unique readers in 2012. Farther down there are links to similar lists going back to 2008, along with several other “best of” type posts that I have flagged for archival purposes.  Don’t necessarily start at the top and work your way down until you get bored.  For the record, I think #25, Volatility During Crises is one of the top two posts of the year.  I’m not sure about #1, but Cheating with Partial Hedges, which didn’t even make this top 25 list, also has to be considered a strong candidate.

Last but not least, each year I also attach the hall of fame label to a handful of posts that I believe have particularly compelling and/or original content, regardless of readership.

Happy New Year!

Related posts:

Disclosure(s): short UVXY at time of writing

Just a Change of Venue? (Fears About U.S. Deficit/Debt Ceiling Replacing Fiscal Cliff Worries)

With the U.S. fiscal cliff negotiations going down to the wire, it is not surprising that fears related to the fiscal cliff topped the list of investor threats to the stock market for the eleventh week in a row in the VIX and More weekly fear poll. Fears associated with governments and politicians as well as excessive central bank intervention polled in second and third place, respectively.

What I found particularly interesting is the sudden rise in fears related to the U.S. deficit and debt ceiling, as investors appear to be concluding that the current fiscal cliff negotiations are now just one more skirmish in the ongoing war between Democrats and Republicans regarding how to address the U.S. budget deficit. With Treasury Secretary Timothy Geithner saying that the U.S. will hit its debt ceiling today and have to resort to extraordinary measures to keep under the legal limit, the stage is set for the next pitched battle when these extraordinary measures can no longer do their trick, in about two months.

So what problems will a fiscal cliff deal resolve? Part of the answer to this question depends upon whether the pending (we hope) deal is merely a stopgap measure or addresses some of the more politically thorny underlying issues related to the budget deficit in a comprehensive way. Of course the trick is structuring the deal in such a way that it does so in a manner which limits any negative impact on the economy.

Stay tuned. A fiscal cliff deal may only signal a change of venue and redirect investor fears to the next battleground.

Once again, thanks to all who participated in this weekly poll.

Related posts:

Disclosure(s): none

Sunday, December 30, 2012

Portfolio Insurance for (Almost) Free

A lot of strange things happened in the financial markets late on Friday afternoon and a good deal of the craziness was in the VIX futures market, with impacts felt in the likes of VXX, which jumped 11.6% in less than an hour (the last 40 minutes of the regular session and the first 14 minutes of after-hours trading.)

The corresponding spike in the VIX futures prices pushed the front two months of the VIX futures term structure into backwardation (a downward sloping term structure curve in which front month futures contract is priced higher than the second month futures contract) for only the second day since November 2011, with the lone exception dating from May 18, 2012, when the front two month contracts were in backwardation by a mere 0.05 points.

The chart below shows how the VIX futures term structure changed over a ten-day period from December 18 to December 28. While all eight VIX futures contracts that were trading on both dates showed in increase, the magnitude of these increases were skewed dramatically toward the front months, where the January VIX futures contract jumped 38.4%, the February contract gained 28.4%, the March contract rose 21.2%, etc. Also of note, whereas the December 18th term structure was upward sloping in an almost perfect linear fashion, by December 28th the term structure had twisted so that the January contract is now trading at a higher level than the contracts for the February, March, April and May expirations. In fact, the market is now pricing in expectations that a VIX of about 22 will persist for the next five months.

[source(s): CBOE Futures Exchange (CFE)]

With the backwardation in the front two months of the VIX futures contracts, this also means that investors who are looking to hedge long equity exposure against an increase in volatility can now take advantage of what is essentially free portfolio insurance. Of course I am using the “free” label loosely, but given that the short-term VIX futures (first and second month contracts) are in contango (front months less expensive than more distant months) more than 80% of the time and subject to the price decay associated with negative roll yield while in contango, I feel it is important to underscore that the short-term VIX futures roll yield is now positive, meaning that if the VIX January and February contracts do not change in price, the positive roll yield should provide a small lift to VXX, UVXY, TVIX and the other short-term VIX ETPs with a long volatility bias.

Now before anyone gets too excited about the possibility of free portfolio insurance, it is important to understand that the reason the VIX futures are in backwardation is that market participants anticipate that the VIX will decline going forward, making a long volatility hedge of limited value. So while long positions in VXX, UVXY, TVIX and their ilk are benefiting from positive roll yield at the moment, most investors consider that a decline in the VIX and VIX futures is likely to more than compensate for any gains due to roll yield, meaning that these hedges will probably be net losers when one accounts for the changes in the VIX futures and the roll yield.

[Since some of the subjects above have not come up for discussion in a fairly long time, today’s set of links is more comprehensive than usual. As always, these are not arranged in order of significance, but are grouped roughly by subject matter, with some of the more recent posts on the subject toward the top.]

Related posts:

Disclosure(s): short VXX and UVXY at time of writing

Monday, December 24, 2012

Fiscal Cliff Widens Lead as #1 Investor Concern

Extending a recent trend, the U.S. fiscal cliff topped the list of investor threats to the stock market for the tenth consecutive week in the VIX and More weekly fear poll. Fears associated with excessive central bank intervention were a distant second, while more general concerns about government and politicians finished third in the poll.

The gap between the fiscal cliff and the runner-up issue was 10.6% this week, the largest in six weeks and the second largest since the inception of the poll some ten weeks ago.

For the second week in a row, geographical differences among the respondents were relatively small, with only minor differences between U.S. and non-U.S. respondents. The regional myopia that had separated U.S. and non-U.S. respondents on the relative importance of the fiscal cliff vs. the European sovereign debt crisis for most of the last three months appears to have subsided over the last two weeks, in conjunction with the widespread lessening of fears over the future of the euro zone.

Once again, thanks to all who participated in this weekly poll.

Last but not least, Merry Christmas, happy holidays and best wishes for a joyful, healthy, happy and profitable 2013!

Related posts:

Disclosure(s): none

Friday, December 21, 2012

Volatility During Crises

[The following first appeared in the August 2011 edition of Expiring Monthly: The Option Traders Journal. I thought I would share it because it might help some readers put the current fiscal cliff crisis in historical context.]

The events of the last three weeks are a reminder that financial crises and stock market volatility can appear almost instantaneously and mushroom out of control before some investors even have a chance to ask what is happening. A case in point: on August 3rd investors were breathing a sigh of relief after the United States had finalized an agreement to raise the debt ceiling; at that time, the VIX stood at 23.38, reflecting a relative sense of calm, yet just three days later, the VIX jumped to 48.00 as two new crises displaced the debt ceiling issue.

Spanning the globe from Northern Africa, Japan, Europe and the United States, 2011 has seen no shortage of crises in the first eight months of the year. Given this pervasive crisis atmosphere, it is reasonable for investors to consider how much volatility they should anticipate during a crisis. In this article I will attempt to put crises and volatility in some historical perspective and address a variety of factors that affect the magnitude and duration of volatility during a crisis, drawing upon fundamental, technical and psychological causes.

Volatility in the Twentieth Century

Every generation likes to think that the issues of their time are more daunting and more complex than those faced by prior generations. No doubt investors fall prey to this kind of thinking as well. With a highly interconnected global economy, a news cycle that races around the globe at the speed of light and high-frequency and algorithmic trading systems that have transferred the task of trading from humans to machines, there is a lot to be said for the current batch of concerns. Looking at just the first half of the twentieth century, however, investors had to cope with the Great Depression, two world wars and the dawn of the nuclear age.

Given that the CBOE Volatility Index (VIX) was not launched until 1993, any evaluation of the volatility component of various crises prior to the VIX must rely on measures of historical volatility (HV) rather than implied volatility. As the S&P 500 index on which the VIX is based only dates back to 1957, I have elected to use historical data for the Dow Jones Industrial Average dating back to before the Great Depression. In Figure 1 below, I have collected peak 20-day historical volatility readings for selected crises from 1929 to the present.

Before studying the table, readers may wish to perform a quick exercise by making a mental list of some of the events of the 20th century that constituted immediate or deferred threats to the United States, then compare the magnitude of that threat with the peak historical volatility observed in the Dow Jones Industrial Average. If you are like most historians and investors, after looking at the data you will probably conclude that the magnitude of the crisis and the magnitude of the stock market volatility have at best a very weak correlation.

[source(s): Yahoo]

Any ranking of crises in which the Cuban Missile Crisis and the attack on Pearl Harbor rank in the lower half of the list is certain to raise some eyebrows. Frankly I would have been surprised if even one of these events failed to trigger a historical volatility reading of 25, but seeing that was the case for half the crises on this list certainly provides a fair amount of food for thought.

Volatility in the VIX Era

With the launch of the VIX it became possible not only to evaluate historical volatility, but implied volatility as well. With only 18 years of data to draw upon, there is a limited universe of crises to examine, so in the table in Figure 2 below, I have highlighted the seven crises in the VIX era in which intraday volatility has reached at least 48. Additionally, I have included five other crises with smaller VIX spikes for comparison purposes.

[source(s): CBOE, Yahoo]

[Some brief explanatory notes will probably make the data easier to interpret. First, the crises are ranked by maximum VIX value, with the maximum historical volatility in an adjacent column for an easy comparison. The column immediately to the right of the MAX HV data captures the number of days from the peak VIX reading to the maximum 20-day HV reading, with negative numbers (LTCM and Y2K) indicating that HV peaked before the VIX did. The VIX vs. HV column calculates the amount in percentage terms that the peak VIX exceeded the peak HV. The VIX>10%10d… column reflects how many days transpired from the first VIX close above its 10-day moving average to the peak VIX reading. The SPX Drawdown column calculates the maximum peak to trough drawdown in the S&P 500 index during the crisis period, not from any pre-crisis peak. The VIX:SPX drawdown ratio calculates the percentage change in the VIX from the SPX crisis high to the SPX crisis low relative the percentage change in the SPX during the same period (of course these are not necessarily the VIX highs and lows during the period.) The SPX low relative to the 200-day moving average is the maximum amount the SPX fell below its 200-day moving average during the crisis. Finally, the last two columns capture the number of consecutive days the VIX closed at or above 30 during the crisis and the number of days the SPX closed at least 4% above or below the previous day’s close during the crisis.]

Looking at the VIX era numbers, it is not surprising that the financial crisis of 2008 dominates in many of the categories. Reading across the rows, one can get an interesting cross-section of each crisis in terms of various volatility metrics, but I think some of the more interesting analysis comes from examining the columns, where we can learn something not just about the nature of the crises, but also about volatility as well. One important caveat is that the limited number of data points does not allow for this to be a statistically valid sample, but that does not preclude the possibility of drawing some potentially valuable and actionable conclusions.

Looking at the peak VIX reading relative to the peak HV reading I note that in all instances the VIX was ultimately higher than the maximum 20-day historical volatility reading. In the five lesser crises, the VIX was generally 50-80% higher than peak HV. In the seven major crises, not surprisingly HV did approach the VIX in several instances, but in the case of the 9/11 attack and the 2010 European sovereign debt crisis the VIX readings grossly overestimated future realized volatility.

One of my hypotheses about the time between the first VIX close above its 10-day moving average and the ultimate maximum VIX reading was that the longer the period between the initial VIX breakout and the maximum VIX, the higher the VIX spike would be. In this case the Long-Term Capital Management (LTCM) and 2008 crises support the hypothesis, but the data is spotty elsewhere. The current European debt crisis, Asian Currency Crisis of 1997 and 9/11 attack all reflect a very rapid escalation of the VIX to its crisis high. In the case of the May 2010 ‘Flash Crash’ and the Fukushima Nuclear Meltdown, the maximum VIX reading happened just one day after the initial VIX breakout. As many traders use the level of the VIX relative to its 10-day moving averages as a trading trigger, the data in this column could be of assistance to those looking to fine-tune entries or better understand the time component of the risk management equation.

Turing to the SPX drawdown data, the Asian Currency Crisis stands out as one instance where the VIX spike seems in retrospect to be out of proportion to the SPX peak to trough drawdown during the crisis. On the other side of the ledger, the drawdown during the Dotcom Crash appears to be consistent with a much higher VIX reading. Here the fact that it took some 2 ½ years for stocks to find a bottom meant that when the market finally bottomed, investors were somewhat desensitized and some of the fear and panic had already left the market, which is similar to what happened at the time of the March 2009 bottom. Note that the median VIX:SPX drawdown ratio for all twelve crises is 10.0, which is about 2 ½ times the movement in the VIX that one would expect during more normal market conditions.

The data for the SPX Low vs. 200-day Moving Average is similar to that of the SPX drawdown. For the most part, any drawdown of 10% or more is likely to take the index below its 200-day moving average. In the seven major crises profiled above, all but the Asian Currency Crisis dragged the index below its 200-day moving average; on the other hand, in all but one of the lesser crises the SPX never dropped below its 200-day moving average. Based on this data at least, one might be inclined to include the 200-day moving average breach as one aspect which helps to differentiate between major and minor crises.

As I see it, the last two columns – consecutive days of VIX closes over 30 and number of days in which the SPX has a 4% move – are central to the essence of the crisis volatility equation. Since the dawn of the VIX, the SPX has experienced a 2% move in about 80% of its calendar years, the VIX has spiked over 30 about 60% of the years, and the SPX has seen at least one 4% move in about 40% of those years. Those 4% moves are rare enough so that they almost always occur in the context of some sort of major crisis. In fact, one could argue that a 4% move in the SPX is a necessary condition for a financial crisis and/or a significant volatility event.

Fundamental, Technical and Psychological Factors in Crisis Volatility

Crises have many different causes. In the pre-VIX era, we saw a mix of geopolitical crises and stock market crashes, where the driving forces were largely fundamental ones. During the VIX era, I would argue that technical and psychological factors become increasingly important. The rise of quantitative trading has given birth to algorithmic trading, high-frequency trading and related approaches which place more emphasis on technical data than fundamental data. At the same time, retail investing has been revolutionized by a new class of online traders and the concomitant explosion in self-directed traders. This increased activity at the retail level has added a new layer of psychology to the market.

In terms of fundamental factors, one could easily argue that the top nine VIX spikes from the list of VIX era crises all arise from just two meta-crises, whose causes and imperfect resolution has created an interconnectedness in which subsequent crises are to a large extent just downstream manifestations of the ripple effect of the original crisis.

The first example of the meta-crisis effect was the 1997 Asian Currency Crisis, which migrated to Russia in the form of the 1998 Russian Ruble Crisis, which played a major role in the collapse of Long-Term Capital Management.

The second example of meta-crisis ripples begins with the Dotcom Crash and the efforts of Alan Greenspan to stimulate the economy with ultra-low interest rates. From here it is easy to draw a direct line of causation to the housing bubble, the collapse of Bear Stearns, the 2008 Financial Crisis and the recurring European Sovereign Debt Crisis. In each case, the remedial action for one crisis helped to sow the seeds for the next crisis.

In addition to the fundamental interconnectedness of these recent crises, it is also worth noting that the lower volatility crises were largely point or one-time-only events. There was, for instance, only one Hurricane Katrina, one turn of the clock for Y2K and one earthquake plus tsunami in Japan. As a result, the volatility associated with these events was compressed in time and accordingly the contagion potential was limited. By contrast, the major volatility events are more accurately thought of as systemic threats that ebbed and flowed over the course of an extended period, typically with multiple volatility spikes. In the same vein, the attempted resolution of these events generally included a complex government policy cocktail, whose effects were gradual and of largely indeterminate effectiveness.

Apart from the fundamental thread running through these crises, I also believe there is a psychological thread that sometimes spans multiple crises. Specifically, I am referring to the shadow that one crisis casts on future crises that follow it closely in time. I call this phenomenon ‘disaster imprinting’ and psychologists characterize something similar as availability bias. Simply stated, disaster imprinting refers to a phenomenon in which the threats of financial and psychological disaster are so severe that they leave a permanent or semi-permanent scar in one’s psyche. Another way to describe disaster imprinting might be to liken it to a low-level financial post-traumatic stress disorder. Following the 2008 Financial Crisis, most investors were prone to overestimating future risk, which is why the VIX was consistently much higher than realized volatility in 2009 and 2010.

While it is impossible to prove, my sense is that if the events of 2008 were not imprinted in the minds of investors, the current crisis atmosphere might be characterized by a much lower degree of volatility and anxiety.


As this goes to press, the current volatility storm is drawing energy from concerns about the European Sovereign Debt Crisis as well as fears of a slowdown in global economic activity. The rise in volatility has coincided with a swift and violent selloff in stocks that has seen six days in which the S&P 500 index has moved at least 4% either up or down – a rate that is unprecedented outside of the 2008 Financial Crisis.

Ultimately, the severity of a volatility storm is a function of both the magnitude and the duration of the crisis, as well as the risk of contagion to other geographies, sectors and institutions. Act I of the European Sovereign Debt Crisis, in which Greece played the starring role, can trace its origins back to December 2009. In the intervening period, it has spread across Europe and has sent shockwaves across the globe.

By historical standards the volatility aspect of the current crisis is more severe than at any time during World War II, the Cuban Missile Crisis and just about any crisis other than the Great Depression, Black Monday of 1987 and the 2008 Financial Crisis.

In the data and commentary above, I have attempted to establish some historical context for volatility during various crises extending back to 1929 and in the process give investors some metrics for evaluating current and future volatility spikes. In addition, it is my hope that concepts such as meta-crises and disaster imprinting can help to bolster the interpretive framework for investors who are seeking a deeper understanding of volatility storms and the crises from which they arise.

Related posts:

Disclosure(s): none

Tuesday, December 18, 2012

The Resurrection of TVIX

It has been quite a year for TVIX, formally known as the VelocityShares Daily 2x VIX Short-Term ETN. At the beginning of 2012, TVIX was trading about a million shares per day and was known to only a small group of investors that followed the VIX exchanged-traded products space. By the middle of February, however, volume in TVIX had soared to 40 million shares, making it the volume leader in the VIX ETP space. It seemed as if TVIX had made the jump from relative obscurity to headline-grabbing rock star status with stunning swiftness and almost no effort.

TVIX soon became a victim of its own success, a fact which was confirmed when Credit Suisse (CS) announced on February 21st that it had “temporarily suspended further issuances of the VelocityShares Daily 2x VIX Short-Term ETNs (TVIX) due to internal limits on the size of the ETNs.” I covered this story and the subsequent fallout in depth and will not repeat the particulars here (see links below for more information) other than to note that the absence of a supply of new creation units led to a substantial imbalance between supply and demand, with the result that the price of TVIX soared relative to its Intraday Indicative Value (a real-time estimate of an ETP’s fair value, based on the most recent prices of its underlying securities) and became almost completely unhinged from any reasonable estimate of fair value. The extreme price dislocation persisted for a little over a month, until Credit Suisse agreed to reopen the issuance of creation units “on a limited basis” on March 22nd. To make a long story short, the price collapsed by more than 50% in two days in the wake of this announcement (see the gap down in the chart below), many investors suffered huge losses and a slew of law suits were not far behind.


Credit Suisse allowed the price of TVIX to fall below 10.00 in late March and below 5.00 in late June, by which time I removed it from my radar screen and replaced it with a similar product, UVXY, which has the additional benefit of being optionable. When TVIX slipped below 1.00 last month, I assumed that Credit Suisse had consigned the ETN to a slow and painful death.

Not so fast.

Late last Friday, Credit Suisse announced a 1-10 reverse split, effective Friday (December 21st) at the open. At today’s close of 0.79, a 1-10 split would bring TVIX back up to just 7.90, which is where the ETN was trading in June.

Based on this news, I can only conclude that Credit Suisse intends to resurrect TVIX, which, much to my amazement, still has more assets than UVXY ($110 million vs. $100 million.)

As I see it, this is still a case of too little, too late. At 7.90, TVIX is only one bad month away from slipping below the critical 5.00 level where most brokers begin to place significant restrictions on shorting. In terms of timing, where was Credit Suisse in April or May, when UVXY was taking significant mind share and market share from TVIX and a reverse split could have stemmed that tide?

Having made the switch to UVXY as my favored product for the +2x VIX ETP space, I am now quite comfortable with a product that has an active options market associated with it and have difficulty seeing the rationale for switching back to TVIX, particularly since UVXY has also had substantially more liquidity as of late.

A number of notable VIXophiles are not even aware that TVIX is going through a reverse split, so this is likely to be an uphill battle for Credit Suisse. Ultimately, the burden of proof is back on TVIX – and on Credit Suisse – to persuade investors that the resurrection of this left-for-dead product is worth trading. As someone who has been an avid follower of TVIX from the day it was launched and who was writing about TVIX long before it was popular, count me as skeptical, but interested to see how the UVXY vs. TVIX drama plays out.

Related posts:

Disclosure(s): short UVXY at time of writing

Monday, December 17, 2012

Fiscal Cliff Continues to Top Fear Poll

In a week in which there appears to have been little progress in the U.S. fiscal cliff negotiations, investors continue to cite the fiscal cliff as the largest threat to the stock market in the VIX and More weekly fear poll. Fears related to government and politicians beat out concerns about excessive central bank intervention as the #2 issue, while anxiety related to the European sovereign debt crisis finished in a tie for fourth.

The poll marked only the third time in nine weeks that U.S. and non-U.S. respondents agreed on the top threat and was the first time that U.S. and non-U.S. respondents placed the top two threats in the same order. In fact, agreement on the order of the threats was the same through the top three.

In another sign that geographical proximity bias has receded, U.S. respondents gave more weight to the European sovereign debt crisis than non-U.S. respondents (the majority of whom are European), while non-U.S. respondents gave more weight to the fiscal cliff than U.S. respondents. In previous weeks, there had been strong evidence of regional myopia.

Another item of note, with last week’s dramatic change in Fed policy away from a timetable to targeted unemployment and inflation rates, one might expect the balance of fear to tilt more in the direction of inflation or deflation this week. Instead, there was a notable jump in concerns over both inflation and deflation, particularly from U.S. respondents.

It is reasonable to ask what might happen if there is a deal in the fiscal cliff in the next week or two. Will a deal also have a significant impact on concerns related to government and politicians or will concerns related to institutions persist and prove to be something more than an event-specific concern? Finally, if the fiscal cliff fears disappear with a deal, which new fears will bubble up to take its place? This week several respondents submitted write-in votes related to high-frequency trading (HFT) and algorithmic trading. Will this be the next fear to stalk the stock market?

Once again, thanks to all who participated in this weekly poll.

Related posts:

Disclosure(s): none

Friday, December 14, 2012

Apple and Yahoo! Moving in Opposite Directions (Again)

Over the years it has not been difficult to find charts in which Apple (AAPL) and Yahoo! (YHOO) have been moving in opposite directions. In fact, just make a chart of any random time frame and it’s a good bet that AAPL will be rising and YHOO will be falling.

For the last three months, however, that relationship has been reversed and it has been YHOO stock that has been on the rise, while AAPL’s fortunes have been on the wane, as the chart below reflects.


Part of the resurgence in YHOO is no doubt due to Marissa Mayer, the new CEO, who has already begun to put her stamp on the company and has given analysts and customers something to talk about. In fact, I searched the blog and it turns out that the company has not warranted a reference here since 2008, seemingly ready to go the way of AltaVista.

Pairs trades in the technology sector can be a rocky ride, but for those who are willing to be long YHOO and short AAPL, the potential for a big winner continues through today’s trading.

Related posts:

Disclosure(s): long YHOO and short AAPL at time of writing

Monday, December 10, 2012

Fear Poll Respondents Focus on Fiscal Cliff, Dismissive of European Financial Crisis

For the eighth week in a row, concerns about the U.S. fiscal cliff topped the VIX and More weekly fear poll. Fears related to excessive central bank intervention nudged out concerns related to government and politicians as the #2 issue, but perhaps the most interesting development is the how much the anxiety related to the European sovereign debt crisis continues to subside.

From a geographical perspective, U.S. and non-U.S. respondents had a relatively low divergence of opinion this week. That being said, whereas U.S. respondents cited the fiscal cliff as the top concern, non-U.S. respondents were most concerned about excessive central bank intervention in the economy. Perhaps part of the fallout from the fiscal cliff negotiations is that U.S. respondents see governments and politicians as much more likely to be the top threat to the stock market, by a margin of 5.6% over non-U.S. respondents.

Interestingly, both U.S. and non-U.S. respondents expressed much less concern about the euro zone problems, with only 4.9% of U.S. respondents citing euro zones as the #1 concern, while 5.9% of non-U.S. respondents put the euro zone issues at the top of the list.

With the FOMC meeting scheduled to wind up on Wednesday, the fiscal cliff talks inching closer to that last day on which legislation can be introduced in Congress for the year (December 18th, based upon a December 21st recess) and Alcoa scheduled to report Q4 earnings and unofficially kick of the next earnings reporting season on January 8th, there is the potential for quite a few things to hit the fan in the coming month.

In spite of all these threats looming just around the corner, the VIX remains subdued and is still in a position to reinforce the notion that December Is the Cruelest Month…for the VIX.

Once again, thanks to all who participated in this weekly poll.

Related posts:

Disclosure(s): none

Friday, December 7, 2012

Unusual Twist in VIX Futures Term Structure as of Late

Even with the U.S. fiscal cliff grabbing all the headlines and keeping the VIX from dipping under 15, I still thought I might be able to trot out my annual series of posts on the holiday effect (or calendar reversion):

As it turns out, fears related to the fiscal cliff have trumped the seasonal factors – at least so far – and the VIX futures term structure has twisted and turned in a decidedly unusual manner.

The graphic below shows the VIX futures term structure curve from November 27th (dotted red line) and again today (solid blue line), eight trading days later. Typically when there are changes in the term structure, the most extreme moves are in the front month (Dec) contract, the second largest move is in the second month (Jan) contract and so on down to the back month, which typically moves only about one third as much as the front month.

What makes the graphic below so interesting is that the front month contract is up slightly (actually up 0.05 points) while the market’s estimation of future implied volatility going out all the way to August has dropped at least 2.2% (Jul and Aug) and as much as 3.8% (Feb). What can we conclude about these changes in the VIX futures? Well, most likely investors are buying protection against a move in December (the VIX futures expire at the open on December 19th) and are selling longer-dated VIX futures contracts for February and other months in order to finance the cost of that protection. All things being said, the market is reflecting less risk in 2013, somewhat offset by a slight increase in risk and uncertainty for the next two weeks or so.

[source(s): CBOE Futures Exchange (CFE)]

Related posts:

Disclosure(s): none

Monday, December 3, 2012

Fear of Governments and Politicians Climb Rapidly as Euro Zone Worries Wane

While concerns about the U.S. fiscal cliff topped the VIX and More weekly fear poll for the seventh week in a row, the big story is that investors are increasingly more concerned about the governments and politicians who are tasked with finding the solutions to these crises than the crises themselves.

Even though it is a global concern, fears and anxieties related to governments and politicians is most evident in the United States, where governments and politicians outpolled the fiscal cliff by a margin of 27.9% to 26.7%. Frustrations over the actions (or lack thereof) of governments and politicians were only the #4 concern outside of the U.S., where the fiscal cliff polled in the #1 slot, followed by the European sovereign debt crisis and continued weak earnings.

Respondents across the globe now see enough progress in the euro zone that the financial crisis in Europe has been relegated to a second tier of worries.

Another development worth noting is the sudden disappearance of an Americentric bias in the fiscal cliff issue. Over the past six weeks U.S. based respondents have been 13.1% more likely than non-U.S. respondents to cite the fiscal cliff as their top concern. This week was the first week that non-U.S. respondents saw the fiscal cliff as a bigger fear than their U.S. counterparts. Of course if one were to attribute most of the anxiety over governments and politicians in the U.S. to the fiscal cliff, then the results of this poll might say more about how different populations see the root cause of the fiscal cliff issue than anything else.

As noted last week, if one adds up the fiscal cliff, euro zone, central bank and government + politicians responses, it is possible to pin some 75-80% of all investor fears on institutions such as central banks and governments, with the fiscal cliff and the euro zone financial crisis merely symptoms of a larger underlying problem.

Once again, thanks to all who participated in this weekly poll.

Related posts:

Disclosure(s): none

Saturday, December 1, 2012

EVALS Details Performance Data for First Year

For the most part, I try to keep information about the VIX and More Subscriber Newsletter and EVALS to an absolute minimum in this space, but lately EVALS has become such a phenomenon that I decided it would be easier to discuss it here rather than to continue to the answer the large volume of questions about this service that inevitably clog up my inbox.

In keeping with tradition, I will touch up on a couple of highlights here and recommend that readers who are interested in more information visit the EVALS blog and start with today’s post, EVALS One Year Summary and Performance Update (+74.13%).

Since November 17, 2011, EVALS has been focusing entirely on VIX and volatility-based ETPs. In the first year of operation, the EVALS model portfolio traded 12 different VIX and volatility-based ETPs a total of 81 times. Some 63.6% of all closed trades were winners and the average winner gained 5.4 times as much as the average loser lost, with a median holding period of 60 days.

For those with an interest in risk-adjusted performance metrics, EVALS had a Sharpe ratio of 1.65 in the first year, a Sortino ratio of 2.39 and a Schwager Gain to Pain ratio of 2.91. More information and performance data can be found on the EVALS blog. Also of interest may be the following equity curve, which shows the one-year performance of a hypothetical model portfolio consisting of $100,000 that was invested in EVALS and the S&P 500 on the November 17, 2011 launch date.

Finally, for anyone who may be confused about what content is in EVALS, what is in the newsletter and what finds its way to the blog, I have updated what I call the content pyramid, which hopefully will be (mostly) self-explanatory.

Related posts (from the EVALS blog):

Disclosure(s): none

Friday, November 30, 2012

XIV and ZIV Are Huge Success Stories Two Years After Launching

It was two years ago today that VelocityShares launched their six VIX-based exchange-traded products and I’m fairly certain I was the only one who was covering that event on the day of the launch: Impressive Launch for Sextet of New Volatility ETNs from VelocityShares.

Two years later, one of these products, the VelocityShares Daily Inverse VIX Short-Term ETN, (XIV), is an unqualified success in terms of assets and performance. Over the last three months, XIV has traded an average of more than 12 million shares per day, making it the second most popular VIX-based ETP, after VXX. Part of the reason for XIV’s popularity is no doubt due to performance. As the chart below shows, XIV is up more than 200% for 2012 and has been the top performer across all ETPs for the year.

The amazing thing about the performance of XIV is that it was not very difficult to predict. In fact, less than one week after XIV was launched, I unveiled my bullish forecast for XIV in the Bespoke Investment Group’s second annual roundtable. When asked about some of my favorite picks for 2011 and beyond, I predicted:

“2011 will mark the rise of volatility as an asset class.  Part of the reason for this rise will be the runaway success of VIX-based ETNs and ETFs, notably the recently launched XIV, which will prove that volatility vehicles can be good buy-and-hold investments.”

As meteoric as the rise of XIV has been, what surprises me is how little attention XIV’s sibling, ZIV, (VelocityShares Daily Inverse VIX Medium-Term ETN) has received. ZIV typically trades about 10,000 shares per day and yet this ETP has outperformed XIV by a substantial margin since the two were launched. Not only has ZIV been a better performer, but it has done so with considerably less risk. In 2011, for instance, XIV was down 45.54% for the year, while ZIV incurred a loss of only 9.20%. I thought perhaps that my ZIV Undeservedly Neglected post from January of this year might jump-start some interest in ZIV, but for some reason, investors continue to shy away from this impressive performer.

The other four products that VelocityShares launched with XIV and ZIV have had mixed results. The most famous of these is TVIX, which was briefly the top VIX-based ETP in terms of volume in February, before Credit Suisse (CS) suspended creation units in the product, which opened the door to the ProShares Ultra VIX Short-Term Futures ETF (UVXY) displacing TVIX as the top +2x VIX-based ETP. For the most part, VIIX, VIIZ and TVIZ have operated as niche products since their launch.

Going forward, don’t be too surprised if XIV and ZIV continue to post impressive numbers and if you haven’t yet looked at ZIV, it is never too late to do so.

Related posts:


Disclosure(s): long XIV, long ZIV, short VXX and short UVXY at time of writing

Monday, November 26, 2012

Fiscal Cliff Concerns Top Fear Poll, But Central Banks and Politicians Seen as Key Systemic Threats

Concerns about the U.S. fiscal cliff continued to top the VIX and More weekly fear poll, while investor anxiety regarding weak earnings, Israel and China all declined substantially.

The biggest change in investor fears over the course of the past two weeks is a growing trend toward the mistrust of the role of institutions such as central banks and governments in economic matters. Concerns about central bankers and politicians are significant enough to poll in the #3 and #4 spots for all respondents, but rate even higher in the U.S., where government and politicians were the #2 concern and excessive central bank intervention worries garnered the #3 spot.

If one considers the fiscal cliff and the European sovereign debt crisis (still polling in the #2 slot on a global basis) to be situations that have been caused by and/or exacerbated by central banks, governments and politicians, then it is not too difficult to pin some 75-80% of all investor fears on central banks and governments.

As noted in previous weeks, the persistent Americentric bias shows no signs of abating. This week, for example, 12.4% more of the U.S. respondents cited the fiscal cliff as the top concern over the European sovereign debt crisis. For non-U.S. respondents, however, the fiscal cliff outpolled the European sovereign debt crisis by only 2.8%.

Once again, thanks to all who participated in this weekly poll.

Related posts:

Disclosure(s): none

Monday, November 19, 2012

Fiscal Cliff and European Sovereign Debt Concerns Recede, Earnings Worries Linger

Concerns about the U.S. fiscal cliff and the European sovereign debt crisis both declined over the course of the past week, as stocks made a concerted effort to establish a bottom, following an 8.9% decline in the S&P 500 index, according to the VIX and More weekly fear poll.

Even though the earnings reporting season is almost over, investors continued to express concern about weak earnings and guidance going forward, with earnings worries finishing a close third in the poll.

The biggest changes in investor sentiment have come in the form of growing discontent with institutions such as central banks and governments and concerns that their intervention in economic matters will have more of a negative than positive effect. Fears about excessive intervention on the part of central banks as well as more broadly with the role of governments and politicians were largely absent just two weeks ago. Taken together, this lack of trust with respect to the two influential policy-making institutions is now as big as concern as that of the fiscal cliff or the euro zone woes, as shown in the graphic below.

The persistent Americentric bias is still apparent. This week, for example, 8.5% more of the U.S. respondents cited the fiscal cliff as the top concern over the European sovereign debt crisis. For non-U.S. respondents, however, the European sovereign debt crisis outpolled the fiscal cliff by a margin of 3.2%.

Also of note from a geographical perspective, U.S. respondents were 1.8% more likely than non-U.S. respondents to tab excessive central bank intervention as their top fear and 5.9% more likely to point to government and politicians as their biggest concern. In addition to placing higher emphasis on the European sovereign debt crisis, non-U.S. respondents also expressed much more concern about China and deflation.

Once again, thanks to all who participated in this weekly poll.

Related posts:

Disclosure(s): none

Guest Columnist at The Striking Price for Barron’s: Calm Down and Exploit Others’ Anxieties

On Wednesday I had an opportunity to serve as a guest columnist for The Striking Price on behalf of Steven Sears at Barron’s for the eighth time, focusing my attention on some of the early findings from the VIX and More Fear Poll in Calm Down and Exploit Others’ Anxieties.

In some respects, the most recent Barron’s article is a companion piece to another Barron’s article I penned in May: Be Greedy While Others Are Fearful. This time around I delve into some of the emerging behavioral finance aspects of the survey results, specifically related to geographical and temporal proximity bias. I also discuss the merits of a SPY short straddle trade as well as long VIX puts as a means to take advantage of some market distortions due to that bias.

As far as the most recent Fear Poll goes, this week the race for the top spot looks as if it will go down to the wire and for the first time so far, there are more than two viable candidates for the top slot. [If you have not voted in the weekly poll yet, now is as good a time as any…]

Related posts:

A full list of my Barron’s contributions:

Disclosure(s): none

Monday, November 12, 2012

Fear Poll: Fiscal Cliff Fears Spike, Concerns About Excessive Central Bank Intervention Rise

For the fourth week in a row, the U.S. fiscal cliff topped the list of investor fears about the stock market. With all the media attention heaped on the fiscal cliff since the election, it should come as no surprise that the fiscal cliff outpolled the second-place European sovereign debt crisis by 10.9%, the widest margin since the Fear Poll began four weeks ago.

Concerns about continued weak corporate earnings held on to the #3 spot, even as the earnings season winds down, while anxiety about problems related to excessive central bank interventions moved into the #4 slot. Among write-in votes, the biggest issue is frustration with government and politicians, which is certainly related to some of fears about how the fiscal cliff and euro zone problems will be resolved.

The Americentric perspective was once again in evidence this week, with U.S. respondents seeing the fiscal cliff as more concerning than the European sovereign debt crisis by a margin of 16.2%, while non-U.S. respondents saw the two issues as almost equally important, with the fiscal cliff winning out by only 1.8%. Interestingly, this parochialism seems to be a largely American phenomenon, as Israeli respondents have been less concerned about Iran than non-Israeli respondents and German respondents have been less concerned about the European sovereign debt crisis than the rest of the world.

With the U.S. elections now in the rear view mirror, U.S. respondents were no doubt at least partly influenced by the media pivoting away from the elections and toward the fiscal cliff issues – a development I analyzed yesterday in The Rise of Fiscal Cliff Concerns.

Thanks to all who have participated in these polls and have helped to generate a very interesting data set. Clearly we have a lot to learn about what drives fear and how those fears can be amplified by geography, media and proximity in time.

Related posts:

Disclosure(s): none

Sunday, November 11, 2012

The Rise of Fiscal Cliff Concerns

How much of the recent selloff in stocks has been triggered by media’s sudden obsession with the U.S. fiscal cliff? Is it possible that very little has changed under the surface, but the decibels associated with this issue are now off the charts?

For the last three weeks, VIX and More Fear Poll respondents have rated the issues surrounding the U.S. fiscal cliff as their biggest source of fear about the future of the stock market. Now that the election is behind us and the earnings season is winding down, these fears have been buttressed by a huge amount of media scrutiny suddenly being devoted to the subject.

The fiscal cliff is one of those issues that has been on the horizon for many months, but only recently have investors begun to pay attention to the problem. Part of the reason for this sudden interest in the fiscal cliff is that Congress and the Obama Administration were not going to address the fiscal cliff during the campaign season and consequently no one expected any progress on the fiscal cliff issues during this period. Now that the election is over, the issue is seen as a ticking time bomb, with a much shorter fuse each day.

While politicians, economists and business leaders across the globe have called for a speedy resolution of the fiscal cliff negotiations between Democrats and Republicans, the highly respected Congressional Budget Office added some new urgency to the dialogue with the publication of two new documents on Thursday:

  1. Economic Effect of Policies Contributing to Fiscal Tightening in 2013
  2. Choices for Deficit Reduction

I cannot say that I pay much attention to the likes of CNBC and Bloomberg TV, but I understand that the fiscal cliff issue is now dominating the business television airwaves as well.

All this makes me wonder just how much of the recent selloff in stocks is driven by substance and how much is driven by the media frenzy.

I took a look at the Google Trends data for “fiscal cliff” and discovered that the issue barely registered on Google’s radar until about May of this year.

[source(s): Google Trends]

There was an occasional mention of the fiscal cliff up through last Sunday, then on Monday, the day before the U.S. election, new interest in the subject began to surface. The big spike in interest in the fiscal cliff happened on the day following the election, when Google search volume in “fiscal cliff” rose tenfold and the media frenzy began.

[source(s): Google Trends]

Over the weekend, concerns about the fiscal cliff have been outpolling (voting is still open) concerns about the ongoing European sovereign debt crisis by the largest margin yet. The real question is whether this is due largely to a redirection of attention by the media and by investors or by changes in the underlying nature of the issue or the likelihood of a timely resolution to the problem. My guess is that more of the former is at work than the latter.

Related posts:

Disclosure(s): none

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