Thursday, March 29, 2012

Another Spike in VXX Volume

Looking the history of the volume spikes in the iPath S&P 500 VIX Short-Term Futures ETN (VXX) is a lot like looking at the history of market sentiment, contrarian thinking and psychology.

Since its launch in January 2009, VXX has been responsible for luring in unwary investors with its siren song promise of huge profits ahead of the next, inevitable, just-around-the-corner selloff in stocks. Unfortunately for VXX longs, the hoped for VIX spike usually turns out to be much more elusive than anticipated and investors who fail to tie themselves to their masts typically end up shipwrecked on the treacherous shore of complacency.

A glimpse at the biggest volume spikes in the history of VXX (see chart below) shows that almost all of these happen at near the top of a VIX spike and leave longs exposed to a sharp downturn. The notable exceptions are largely limited to last August, when a surge in VXX trading volume accompanied the first leg up of what turned out to be a multi-stage rally in the VIX and VXX.

If history is any guide, the current VXX volume spike (with 75 million shares traded yesterday, the only stock that traded more shares was BAC) is likely to turn out to be some combination of wishful thinking and an overreaction to yesterday’s mini-spike, when the VIX traded over 17.00 for the first time in thirteen sessions. Then again, history has not been a very good guide for the last few years and triskaidekaphobics in particular should always prepare for the worst…

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Disclosure(s): short VXX at time of writing

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