US stock index bull run knocks VIX down but not out
|- The VIXY ETF reaches lows never seen before.
- This instrument brings volatility trading closer to traders who don't want to leverage their bet.
- Stock markets are unprecedented extremes, in price, in volatility – and in complacency.
The leading American stock indices continue to beat records and shatter forecasts.
Many investors are trapped in bearish positions, wondering when a market that has been rising for more than ten years will turn and with clear signs of an economic slowdown.
For this analysis, the VIX (VIXY volatility ETF) chart comes handy. The VIXY Exchange Traded Fund (ETF) seeks to track the performance of the S&P 500 VIX Short-Term Futures Index.
This ETF quantifies the level of the implied volatility of the S&P500 index. In classical trading, the bearish phases of the market bring with them an increase in the levels of volatility, understood as a measurement of the prevailing fear in the trading pits.
Volatility clusters like duck flocks
Benoit Mandelbrot provides one of the most definite views of volatility in his book "The (mis) behaviour of markets: a fractal view of risk, ruin, and reward"-.
One of the book's most valuable concepts is that it talks about the tendency for volatility to be grouped into phases. Low volatility has been clustering for almost a decade until reaching lows never seen before.
According to Mandelbrot, when the market turns around, and volatility starts to increase, the scenario will be the opposite. Extremely high levels of volatility can be reached in the same way – hitting highs unseen in the past and enduring for a prolonged period.
The long-term graph dates back to the beginning of 2013. At that time, the value of a stake in this VIX ETF was approximately $1,900, while today it is less than $16.
The trough of the series was reached on Monday, November 4, with $15.26 per ETF share.
The SMA200 is currently trading for $22.26, which represents a potential gain of 40.97% (+$6.46).
The SMA100 currently passes for $19.89, which represents a potential gain of +25.65% (+$4.06).
The EMA 50 currently passes for $18.46, which represents a potential gain of +17.04% (+$2.69).
The short term volatility indicator marked the low point of the series on October 29, with a level of 0.36, and since that day it has not stopped growing, even with lower prices.
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