Looking Ahead At VIX & VIX Futures Near All-Time Market Highs

The stock market has been rallying in full force over the past month with the S&P 500 up 7.2% since it put in its low on 6/24.

VIX has fallen 34.5% since that date with VIX futures following suit across the board (see chart below), driving VIX-related ETPs accordingly:

  • XIV:  +40.7%
  • ZIV:  +16.6%
  • VXX: -30.0%
  • UVXY: -52%

  • Our Daily Forecasts have performed well over this time, with the VXX bias shifting from positive back to negative on the evening of 6/21...

    ...and the VXX Spike risk dropping back below the danger zone (60%) on the evening of 6/25 and staying there ever since.

    Actual historical volatility of the S&P 500 has started coming into play to hold the VIX up a bit. HV60, the actual volatility over the past 3 months (60 trading days), is serving as a floor to the VIX, as can be seen in the chart below.

    For trading of VIX ETPs over the coming weeks what's important to note is...

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    BlackRock Confirms: Volatility Is A Valuable Asset Class

    While not necessarily news to those who have been in on the volatility game for a while, BlackRock's decree to the world that volatility is an asset class should open more investor's eyes to this excellent trading vehicle.

    BlackRock, which manages $3+ Trillion in assets, specifically prefers to sell equity volatility -- a common theme here at Trading Volatility as well as with many others who have come to love shorting VXX, UVXY or being long XIV and ZIV over the past few years.

    A couple quotes via the Forbes article:
    "Volatility is an asset class that can be harnessed to increase returns and reduce risk, according to the firm. BlackRock favors selling volatility via futures on the CBOE Volatility Index (VIX), puts on the Standard & Poor's 500 index and other securities, and variance swaps. These short volatility strategies are integrated into the equity allocations of investment portfolios."

    "Selling volatility on a broad equity index has a positive expected return premium over time, as the seller effectively provides insurance to the buyer of volatility"

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    VIX Nears A Floor After A Week Of Heavy VIX Selling

    VIX took a holiday as well this week falling 11.9% from last Friday's close. The VIX Futures term structure contango steepened as all months along the curve fell in proportion to VIX. Here's the week over week change in term structure:

    From our daily forecasts we can see that after a month of elevated spike risk, the VXX Spike Risk forecast fell below the 5.0 "danger zone" on the evening of June 26th and remained there this week, with VXX losing 12% since that time (and XIV +13.3%).

    Spot VIX is starting to press down towards the VIX "floor" set by actual market volatility over the past 3 months (HV60), with VIX now just 5% higher than HV60. We could still see VIX press down into the 13s, but I don't expect it to head much lower (see green circles below).

    UPDATED 7/8: Corrected week-over-week term structure chart and VIX % change

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    Reviewing June's VIX ETF Forecasts And A First Look At July

    June was a tough month for inverse VIX ETFs such as XIV and ZIV. A relatively flat term structure and somewhat skittish markets led to losses of 10.9% for XIV and 9.3% for ZIV.

    Let's take a look at what the Trading Volatility daily forecasts were telling us over the past 5 weeks.

    The VXX Spike Risk forecast spent nearly the entire month (from the evening of 5/28 until evening of 6/26) above 6.0, indicating an above average probability of VXX spiking. During this time we saw a rash of days with VXX gains as it rose 18%.

    Looking at the chart of the VXX bias forecast vs VXX price we can see that the VXX bias spent most of June in or on the edge of VXX neutral zone (between -1 and +1) which was not enough to offset the rise of the underlying values of the VIX futures.

    Similarly, ZIV suffered from the high VXX spike risk and relatively small bias of its own.

    Overall, the VIX futures and market dynamics looked a bit like the May-July 2011 timeframe, which saw mostly sideways & choppy action. If we see more of the combination of a neutral VXX bias and high spike risk it will turn into a 2007-type dynamic (flat term structure and rising futures along the whole curve) which could justify VXX long positions, even with a slightly negative VXX bias.

    As we look forward to July, we can see from the forecasts above that the VXX spike risk finally dropped below 5.0 on 6/26 and the VXX bias has started to grow more negative. This will create a better environment for XIV and ZIV as long as this forecast trend continues.

    About the Trading Volatility Forecasts
    The Trading Volatility daily bias forecasts provide important information about the headwind or tailwind of VXX, XIV, and ZIV based on the VIX Futures term structure. Over longer timeframes, a positive bias will help the price of the security to move up while a negative bias help push the security go down.

    The Trading Volatility spike risk forecast indicates that the structure of VIX and VIX futures put VXX at risk for moving higher in the next 1-2 days. When this value is above 5.0 I often look for ways to protect my portfolio by reducing exposure to XIV & ZIV and increasing exposure to VXX.

    You can read more about Trading Volatility's forecasts here.

    You can get access to the current daily forecasts and other VIX futures data by subscribing to Trading Volatility+ for less than $3 a day.

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