VIX and VIX ETNs fall broadly for the week despite fears of fiscal cliff, European recession, falling equities and escalating Middle Eastern conflict.
VIX, the CBOE S&P 500 Volatility Index, also known as the “fear” indicator, fell sharply this week in spite of plenty of scary news at home and abroad.
The fiscal cliff continues to be a problem, although Friday’s meeting among political leaders at the White House was termed “constructive” and so apparently soothed some of those fears. Fiscal Cliff Fears Ease On Friday
Europe is now officially in recession and things continue heating up in the Middle East as rockets hit around Jerusalem and Tel Aviv. Euro Zone Recession Takes Toll On Stocks
Nevertheless, speculators in the “fear” index seem quite complacent that everything is going to work out as the index fell and remains well below its long term averages.
The major U.S. index ETFs are down for multiple weeks in a row and the S&P 500 (NYSEARCA:SPY) is off 7.2% from its September high while the Dow Jones Industrial Average (NYSEARCA:DIA) is off more than 1,000 points.
During that period, the VIX is up some 17% but has been treading sideways for the past month or so during the current correction.
chart courtesy of StockCharts.com
In the chart of VIX above, we can see how the index spiked off long term lows made in mid-September, breached the 50 and 200 day moving averages and then fell back to current levels just above the 50 day moving average but well below the long term average in the 20s.
The reason for this complacency can be pinpointed to several possible factors.
1. Speculators and investors believe the fiscal cliff will be avoided and trigger a relief rally in stocks which would drive VIX ETNs lower.
2. We’re entering the best six months of the year and typically markets see a year end and “Santa Rally” extending into the first part of a new year.
3. Traders are selling put options that they had previously bought and have made profits on which is now driving VIX and VIX ETNs lower as they close out those trades.
VIX ETN Weekly Update:
Volatility Index – New Methodology (VIX): Index: -11.2%
iPath S&P 500 VIX Short-Term Futures ETN (NYSEARCA:VXX): -6.7%, This ETN is designed to track volatility in the markets as measured by the Chicago Board Options Exchange Market Volatility Index (CBOE Index), a popular measure of the implied volatility of S&P 500 index options.
VelocityShares Daily 2X VIX Short-Term ETN (NYSEARCA:TVIX): -12.9%, This ETN is designed to track 2X return on volatility in the markets as measured by the S&P 500 VIX Short-Term Futures Index.
Bottom line: VIX and VIX ETNs remain quiet and reflect current complacency in equities markets in spite of recent volatility and significant headline risk. Market bottoms typically come after a spike in volatility and negative sentiment and so VIX would indicate that this correction might not be over yet and higher prices for VIX and VIX could yet be ahead.