BY ANDREW GIOVINAZZI
August 5, 2024
Yo Pit Crazies,
The story of VIX this week is really about the news and that bad news is bad again. VIX dropped and popped on the earnings news, the FOMC, and mideast worries. That was the brew that kept VIX moving. What the market, or at least the algos, did not like was the NFP report. It came in very light, way below what was expected and with the less than perfect earnings stocks dropped from dizzy heights.
5 day VIX chart with Vol Man highlights
What you notice is VIX made a low this week in the 15s and high of around 29 before dropping back to the top of Zone 3 at 23.39. That is just shy of the Danger Zone 4 of greater than 24 or the top quartile of volatility that we have not seen in 2024. The big reason for this is SPX stopped dropping on Friday. VIX did not hold the peak which is gives the bulls a small reason to celebrate.
A higher VIX is not the thing that worries me most.
It is this.
Backwardation in VIX is very severe
Backwardation is the condition where VIX cash is over all the VIX futures and the short term futures are higher than the back month futures. Severe backwardation is below where all the short term implied volatility in the SPX are very high, causing the condition below.
This is traders telling us they expect very volatile conditions moving forward. We can be down another 3% to 2%. What we saw Friday is not over. As an investor, a lot of stocks are cheaper which is great but they just might get cheaper this week.
As a trader VIX tends to get stuck in the 20’s which SPX whips up and down so there will be trading opportunities all week but I am not sticking my foot in the sand and saying this is the bottom for SPX. At least the VIX futures are not saying that.
I am still holding VIX call spreads in Weekly Profit Cycles. I closed the SPDR S&P 500 Trust ETF (Ticker: SPY) put spreads Thursday near the end of the day, but don’t be surprised if there is one more blowoff in SPX that pushes VIX to the 30s. It has been a while and a lot of short vol funds have gotten lazy selling options.
Once the backwardation subsides, I expect the ranges in SPX to start dropping. That will be a better time to dip the toe in the water.
To Your Trading Success,
AG
Andrew Giovinazzi
30-Year Trading Pro
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