The VIX Edge
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We ended the week with the SPX down about a touch over 50 points on the week. About a 2% drop on the week.
Yet take a look at the price action of the VIX.
Almost straight down. Why? Well remember, the VIX is not the “which-way-is-the-market-going” gauge (that was a mouthful), it is the Fear Gauge. It is derived from two major components:
- How much is the market moving right now
- How much MIGHT the SPX move in the future.
The pronounced drop in the VIX clearly comes from the fact that movement is SLOWING. Realized volatility has dropped from daily moves well over 5%, to daily moves under 3%. At Friday’s lows, down about 2.5%, the VIX fair value would be 40. Thus, unless we see a serious increase in movement again, VIX is unlikely to pop and more likely to drop.
In addition, the drop likely means the market thinks that future movement is not going to pick back up to levels we saw recently.
Does this mean we are at a bottom? Not necessarily. Remember in 2008-2009 the top of the VIX and the bottom of the market were separated by 4 months. However, that does likely mean that there could be some value in put selling to get into stocks.
The bottom might not be in, but the top for VIX probably is.
The Option Pit Traffic Light
VIX/SPIKES light is BARELY yellow.
This is because the VIX curve is STILL backward despite the drop in vol
We think we are in a rare spot where the SPX and VIX could drop on the week. We like a combo of SHORT S&P 500 and SHORT VIX futures.
Your Only Option,
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