VIX Ratio - Daily/Zoom INVIX Ratio - Daily/Zoom IN
VIX3M/VIX ratio
13MA for both ratio and ES
RSI-W for ratio
Heikin Ashi ratio
VIX3M trade ideas
VIX remains bearishI have been finding VIX3M provides a lot smoother and cleaner version of the vix. As you can see before significant vix spikes there are signals that take 6 months+ to develop. Before vix spikes we can see the loss in momentum when vix starts to base failing to make new lows or significant new lows as well as MACD starts up-trending on the weekly chart. I have marked off the key significant levels on the vix. We appear to be at one of those levels that so happens to be the same level the vix first found a reaction off coming off the 2009 vix spike.
I would expect the vix to start basing here but always remain open to anything. If we do start basing here that could indicate we will get a large vix spike later this year or early next and a give back of 15-20% in the S&P500. I remain net long the market but have bids in to pick up vix calls in Jan-March 2022.
MACD still remains in a downtrend so we have yet to see the momentum start to shift bullish in vix which keeps my bullishly biased until this changes. We still should expect the possibility of minor single digit percentage pull back and possible vix spikes up to 30 while the general uptrend in the S&P500 continues. Hedging these smaller spikes still remains a consistently profitable strategy by buying vix calls on the bottom channel of the trend we are currently in.
Is the economy going to hit a wall?The problem with the worlds economies reopening now is the stock markets already priced in the reopening over the past year with lower inflation numbers and massive QE.
How do the markets avoid hitting this inflation wall?
Fed says it's "transitory", is there enough QE left to jump this wall?
How does one chart "transition" with indicators?
Ever chart I pull up is overbought, has to much debt and highly speculative based on future earnings.
Leverage is at an all time high along with the S&P.
Yields are approaching the limit they will stretch.
VIX BackwardationPast instances of this extreme in vix term structure has marked a short-term bottom, followed by continued selling over the following weeks and months.
Large divergence between volatility expectations and stocksA Tweet from Tracy Alloway with Bloomberg caught my eye this morning (twitter.com). She points out that the one-month VIX just tipped over the 3-month VXV. While this has happened many times in the past, I did notice that there is a rather large divergence between the VXV/VIX ratio and the SPX right now. The chart says it all folks. This certainly doesn't guarantee a sharp decline in stock markets, but this is definitely something to watch for today and tomorrow.
Range boundVolatility continues to be "crushed." Reviewing the VXV to VIX ratio we can see high probability shorts and pull-backs. As long as the ratio remains range bound the markets will remain within striking distance of "highs"
Update on VIX /VXV - Volatility contango intact but muted.Volatility traders over the last weeks have been seeing a "flattening" of volatility structure and have not been getting the returns they were expecting for contango trades. (If you want to see contango at work, pull up a 5 year chart of UVXY. Those losses? Contango.)
These charts show what is happening. The VIX (short term volatility) is rising from its depressed levels in late May while VXV (90 day volatility) is rising at a slower rate from a deeper fall in May. Why is that important? Remember that all of these volatility ETNs / ETFs have "roll." Roll is the daily sale of short term volatility and purchase of mid term volatility. Where do they get their supply of short term volatility to sell? From holding the mid term until it becomes short term. Just about any volatility symbol you can buy or sell employs such a strategy.
So how does that create a flattened volatility structure? Simple. On some days that the VIX spikes a bit, those short term volatility sales (purchased as mid term contracts weeks before, when the VXV was depressed too) are actually profitable. Normally there is loss due to theta and risk premium. But all futures players know that the key to winning is entering and exiting at a price move before theta and premium gets you. Well these ETFs are doing that on a few days here and there by pure luck. Most days theta and risk premium produce the deep contango that vol traders love. Do the math - as the VIX slowly rises so will the VXV, but if the VIX leads (which it is doing now) then there will be more days where those purchased-as-mid-term-and-sold-as-short-term vol contracts pay. Certainly not every day - just some days.
The structure is flattening also in part due to the volume of trades these ETFs / ETNs (and the array of HFT systems that arbitrage them and their underlying trades) generate. There is a "tail wagging the dog" effect that this volume has created that didn't exist when vol futures were only affected by OTM Put bidding on the S&P. More and more trades bypass OTM Puts and go straight to volatility. The VIX itself doesn't "see" those trades (partly why it is historically low and is likely to stay low.)
The VIX/VXV ratio chart on the left shows us this "flattening" as we touch that magic .9 threshold that induces backwardation fear. I placed an indicator underneath it that shows the contango rate movement of one of the highest volume vol ETNs out there - my fav of favs, UVXY. The orange line is the daily contango rate. A spike above 1 generally means the contracts rolled that day were at a profit and below at a loss. The white and black lines are smoothing functions. Notice the black line rising slightly but still under 1? That means one thing: Volatility contango is intact but muted.
The VIX will bounce around day to day and should continue rising such that we see spikes into 17s once in a while again. So there will be more days where the roll is a winner. But over all it remains a loser. Just look again at that 5 year UVXY chart.
SnP500 bearish divergenceBy the solid blue line represented S&P500 shows lower low and lower high in April .
Relation of VXV (CBOE S&P500 3-M Volatlity) and VIX (CBOE Volatlity) - candle chart - gives us information about the VIX term structure (VXV/VIX>1 => contango, VXV/VIX<1 backwardation). The lower the number, the higher the possibility of correction within 3Mo (by exhausting) according to the option community. The blue and green lines are the MA(50) and MA(20) respectively.
S&P500 achieved new hihgs by the begin of April (see interrupted blue line on the top of S&P500) while both MA's ware falling.
The MACD, built on the VXV/VIX, shows bearish divergence also. This MACD is very far from the underlying market and wouldn't have any relevance alone. A reinforcing/confirming supplement to the other signs.
