Vol Edge: End of Peak Fear

We have officially entered a new phase in the markets.  I am officially announcing the end of ‘Peak Fear’ as I said on Mad Money yesterday.

But what does that mean? Does peak fear being over mean we are out of ‘Zone 4’ in the VIX.  

No, it does not.  But it does mean that minus any new information we are probably not going to see 80 VIX again.  However, that does not mean we are due for 20 next week. It is going to be a nice long while before we break 20 in the VIX.  Could be weeks, more likely months before the VIX even SNIFFS at a sub 20. The 30’s are likely to be hard for the time being.  

I would expect us to see more of what we saw the last few days, like Monday and Tuesday, where in two days we are up over 250 points at the top and then in no time…we give it away.

The market is going to be choppy, and sloppy. Meaning we will have periods where in a short time we sell off 200 S&P points.  As these periods are coming to an end, VIX will tank.

We will also have periods like this when we are rallying and the VIX is super firm.  The last 5 days seem to sum up what I think trading could be like for the next few weeks

Notice VIX was down last week, WITH THE MARKET.  And now it is UP this week, WITH THE MARKET. This is a sign of confusion, not panic.

The market is no longer fearing the whole world falling apart.   BUT, it does not mean the market thinks all is well. 

VIX futures tend to agree where we can see VIX is CLEARLY still in backwardation:

With the curve in a steep backwardation it is hard to imagine a sustained rally for any time in the near future.  Not until we get an ‘end date.’ Once we have that, VIX futures might recede and the S&P 500 might start a real rally.

I will say that currently the best leading indicator has been realized volatility.  When we have had roaring up days, that has signaled the END of rallies. Likewise, when the sell offs have been muted, that has signaled a turn around.

Here is the thing though, muted, currently means a move of less than 2.5%.  As a VIX of 46.7, implies 3% daily moves for the next month.

As it stands now, realized volatility is falling.  It needs to last for us to gain any bull traction.

This would mean that 20 day HV dips back below 60 day.  Would be even better to see it dip below the VIX index.   We are a ways away from that, although it is nice to see 10 day HV truly backing off.  

Option Pit Traffic Light:

SPX:  Yellow

SPX IV:  Yellow

VIX:  Yellow

VVIX:  Red

VXX:  Green

Your Only Option,


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