VIX Narrowly Misses New Consecutive Day Decline Record

After falling for a record-tying ten consecutive days, the VIX narrowly missed setting a new record today when it jumped 0.37 in the 4:00 - 4:15 p.m. ET twilight zone trading period to finish the day at 21.49, +0.06.

In the chart below, which I borrowed from the subscriber newsletter, I offer some data to help put the current decline in an appropriate historical context. Prior to the streak that ended last Friday, the only other time that the VIX fell for ten consecutive days was in April to May of 2005. At that time, the bull market was just beginning to pause for a month and it was not until six months later that bulls began to reassert themselves.

Looking at the other fifteen instances in which the VIX fell at least seven days in a row, a pattern emerges in which following the VIX streak, the S&P 500 index has a tendency to post a slight loss for a week or so, then significantly outperform the historical averages (“census”) for the balance of the periods studied, from 10 to 100 trading days.

In terms of adding an interpretive narrative, think of a streak of the VIX declining for seven or more days in a row as a signal that the markets are recalibrating volatility expectations and paving the way for further advances in an environment of diminished risk. Of course the caveat is that a week or so of mean reversion (i.e., an increasing VIX and a declining SPX) usually serves as a transition from the streak of VIX declines to an extended period of above-average stock market returns.

For a related post, readers are encouraged to check out Steaking – an early VIX and More classic and also an official lighter side selection.

Volatility Analysis for July 15, 2009

One what was one of the more interesting days in volatility in a long time, I thought I should pass along a few random thoughts:

1. The intraday tick for tick positive correlation between the VIX and the SPX was as strong as I have ever seen. Most of the time the VIX and the SPX move in opposite directions. Today it was almost as if someone has inverted the gravitational forces acting upon these two indices. (For more on the correlation between the VIX and the SPX, check out the posts with the SPX-VIX correlation label.)
   
   
2. The SPX finished the day up 2.96%, with the VIX up 3.48%. This is the first time ever that both indices moved more than 2.8% in the same direction on the same day.
   
   
3. For more on days in which the VIX and SPX both have strong moves to the upside, check out my June 1^st post, Eerie Déjà vu as VIX and SPX Both Jump More Than 2.5%
   
   
4. When both the VIX and SPX are up on the same day, this is historically bearish, generally conveying an edge of 0.25% or to the bears for 3-5 days. This edge begins to diminish substantially after about a month or so.
   
   
5. Regarding today’s VIX movement, keep in mind that the VIX gapped down about 0.80 when Intel (INTC) earnings were announced after hours yesterday. So with the SPX essentially frozen, there was a 0.80 offset going into the day from the 15 minute twilight zone while trading that took place yesterday from 4:00 to 4:15 p.m. ET. If we were to back out the 0.80 after hours VIX drop, then the VIX would have finished approximately flat today – still an interesting development, but a lot less noteworthy.
   
   
6. As predicted earlier today (VXX Volume Spiking to New Record as Investors Bet on Increasing Volatility), the iPath S&P 500 VIX Short-Term Futures ETN (VXX) crushed the old volume record, with 1,537,844 shares exchanging hands, eclipsing the old record by more than 440,000.
   
   
7. Finally, Tuesday was a particularly interesting day to see volatility drop so low, with so many very important volatility events right around the corner, including a critical earnings reporting season, a flood of highly anticipated economic data and options expiration.

Late Day Rallies, the SPX and the VIX

Today was an interesting trading day, particularly during the last hour of equity trading.

The graphic at the bottom records (in Pacific Time) the intraday movements in the VIX, which was essentially flat for all but the first hour and the last 22 minutes of trading. At 3:00 p.m. ET, the VIX stood at 30.97, down 0.70 (-2.21%) from yesterday’s close. At that same moment, the SPX was at 906.67, down 0.16 (-0.02%) for the day.

The SPX began a slow and steady rise at the beginning of the last hour of trading, with the VIX gradually pulling back. The table below captures the changes in the VIX and SPX during that last hour. Note that the VIX, whose values are updated every 15 seconds, begins to move sharply at 3:38, then creates the first of several gaps at 3:41. By 3:59, one minute before NYSE trading closes, the VIX has moved about 4.5x of the percentage change in the SPX, in the opposite direction. At 4:00 the stocks that comprise the SPX stop trading. The daily high of 920.02 for the SPX was recorded in the minute that followed, as some trade data trickled in after the bell. During the two minutes after the close, the SPX was revised down in small increments several times, before being finalized at 4:11.

While the individual components of the SPX stop trading at 4:00, SPX index options trade for an additional 15 minutes in what I like to refer as the twilight zone trading period. This can lead to some interesting VIX prints, particularly if there is a strong move in the SPX toward the end of the regular trading session or if important news breaks during the 15 minute twilight zone. What apparently happened today is that the supply of SPX options overwhelmed demand in the last few minutes of the regular trading session and carried over into the 15 minutes of index options trading. By the time the VIX was finalized, at 4:15 p.m. ET, it had fallen all the way to 28.92, a move that was 6.4x the percentage change of the SPX, in the opposite direction.
Normally, when one sees a dramatic change in the ratio of the VIX to SPX percentage moves, this is indicative of a substantial imbalance in the supply and demand equation for SPX options.

As a side note, those who are analyzing historical VIX and SPX data should be aware that the different cutoff times can occasionally lead to some unusual data anomalies.

For additional information, check out a related post on this subject from January: VIX (and VXN) After Hours.

[source: thinkorswim]

Today’s Jump in the VIX

Lately it seems like I am the only one who is not talking about the VIX. I find it particularly ironic that many of the same people who were pounding the table saying that the market could not bottom unless there was another dramatic VIX spike and high volume capitulation are now insisting that the markets cannot rally from current levels until the VIX continues down. I suspect these pundits will end up going 0 for 2 in their predictions.

For the record, at the very moment the SPX formed the “devil’s bottom” of 666.79 on March 6^th, the VIX was at 51.65, which was not even the high for the particular day. By the end of the day, the VIX was down to 49.33 in what looks in retrospect like a classic stealth bottom.

So what is driving the VIX right now? In a previous post, I opined that a simplistic conceptual model of the VIX is one which “incorporates incremental changes in uncertainty and fear on top of recent historical volatility.” Many of the common measures of historical volatility (10, 20, 30 and 50 day) show that historical volatility in the SPX topped in the middle to latter portion of March. Since the 7.08% jump in the SPX on March 23^rd, trading has been relatively subdued from a volatility perspective. As that 7.08% jump as well as the 6.37% and 4.07% jumps from March 10^th and March 12^th begin to scroll off the lookback window, historical volatility numbers should begin to lead the VIX back down.

As far as fear and uncertainty are concerned, the fear of a global systemic bank failure seems to be receding, while concerns about a deepening global recession are lingering and still rising in some quarters. The G-20 meeting underscored the willingness of leaders of the world’s largest economies to coordinate their activities, even if they cannot agree on the details of those coordinated efforts.

Finally, we are in a news cycle lull this week, but earnings season officially kicks off with Alcoa (AA) reporting tomorrow.

The bottom line is that current levels of the VIX are in line with historical volatility readings and changes in the macroeconomic landscape. The fear component of the VIX is clearly on the wane, which should mute any VIX spikes. On the other hand, historical volatility needs to continue to decline and the VIX term structure (which is based on SPX options) and VIX futures need to soften somewhat before the VIX can reasonably be expected to start trading in the 30s on a regular basis.

Many analysts have a tendency to rely too heavily on charts when looking at the future of the VIX. While charts can provide some useful information and it is nice to know that the VIX has recently moved below its 200 day moving average, sometimes putting the VIX in the proper geopolitical and macroeconomic context is a more valuable approach.

So…I think the VIX is about where it should be right now and stocks can resume their move up without the VIX being required to plummet. In fact, if the bulls continue to keep the upper hand, expect the VIX to decline in a decidedly gradual fashion.

Finally, the VIX jumped 3.1% today, while the SPX lost 0.83%. That -4x move is typical of the VIX, but not on Mondays, when ‘calendar reversion’ usually means the VIX jumps about 1.5%. Add to this the 1.53% that the VIX fell during the 4:00 – 4:15 p.m. ET index trading portion of Friday’s session and one could make the argument that the VIX barely moved at all today relative to the SPX.

For another perspective on the recent movements of the VIX, I recommend More Ways to Look at Volatility from Daily Options Report.

VIX (and VXN) After Hours

I recently received a question about large movements in the VIX at the end of the day.

Before I answer this question, it is important to recall that trading hours for index options are 9:30 a.m. – 4:15 p.m. ET.

As I see it, this question about late day movements in the VIX spans two very different time frames:

• the last 15 minutes or so of the regular equities trading day (3:45 – 4:00 p.m. ET)
• the 15 minutes following the close of trading of equities, during which stock index products are still traded (4:00 – 4:15 p.m. ET)

Looking at the earlier period first, during the last 15 minutes of regular trading on the NYSE and NASDAQ, high volume program trading often kicks in and includes or sometimes triggers a large volume of SPX options trades. These situations are relatively easy for retail trader to spot on the tape and are generally consistent with sharp moves in the SPX.

The fifteen minutes of index trading following the close of the equities market are more often associated with unusual large moves in the VIX. Part of the reason for this is the large volume of news that is announced just after the market close. Included in these announcements, of course, are earnings reports, such as today’s eagerly anticipated report from Google (GOOG).

In an announcement that crossed the wires at 4:01 p.m. ET, Google beat analyst estimates for both revenues and earnings, sending the stock up over 2% in the 15 minute twilight zone while index trading was still open.

Google is the second largest component of the NDX (NASDAQ-100), so the obvious place to see Google’s impact on the volatility indices is the VXN. The chart below, courtesy of thinkorswim, shows the VXN during the last 16 minutes of today’s regular equities trading session (using my local PT time stamp), as well as during the 4:00 – 4:15 end of the index trading session. The chart shows the positive surprise in Google helped to push VXN down 0.99 (2.1%) in the 15 minutes after the close of trading in the NYSE and NASDAQ regular session. Had Google beaten analyst expectations by a larger amount – or had a significant miss – I would not have been surprised to see the VXN move 5-10% during the twilight zone.

[source: thinkorswim]