From the March 2013 issue of Research Magazine • Subscribe!

February 22, 2013

How Low Can the VIX Go?

Stock market volatility in 2013 has continued its downward trend toward levels experienced just before the onset of the 2008 financial crisis.

The CBOE S&P500 Volatility Index (VIX) spent much of January between 12 and 14, near its 52-week low.

A depressed VIX can be interpreted as too much complacency or lack of fear in the market. It’s frequently used as contrarian sell signal. Conversely, an elevated VIX infers a high level of fear and could be a good buy setup, depending on the circumstances.

Exchange-traded products that go long the VIX, like the ProShares VIX Short-Term Futures ETF (VIXY), continue to make new lows. The iPath S&P VIX ST Futures ETN (VXX) is down 98.5% since its inception in 2009. The selling pressure in long VIX ETPs will continue until stock market volatility pops. 

Last year was one of the calmest years in terms of stock market gyrations.

Russell Rhoads, CFA with the Options Institute at the CBOE observed: “There were only two trading days where VIX closed at a premium to the Modified Future. In fact those two days were December 27th and 28th when the S&P 500 was under pressure based on fiscal cliff fears going into the end of the year. When VIX moves up quickly the futures markets subsequently price in a drop. With one small exception a spike in VIX just did not occur in 2012. Also, the high low range for VIX in 2012 was the narrowest range since 2012.” 

Rhoads uses the Modified VIX Futures contract in order to have a consistent futures price to compare to VIX. Simply put, the Modified VIX Futures contract takes a time weighted average of the front two month futures contracts to create a single futures price to compare to the VIX index. 

There are two takeaways from our VIX analysis: (1) Over time, volatility will revert to a mean or average, and (2) A stock market without fear is a dangerous place to invest.

The all-time low for the VIX was 9.31 on Dec. 22, 1993 and there have been only five days since 1990 when VIX has closed below 10. The table shows the high-low range for VIX by year from 2007 to 2012.

Ron DeLegge is the editor of ETFguide.com and author of Gents with No Cents: A Closer Look at Wall Street, its Customers, Financial Regulators and the Media (Half Full Publishing).

 
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