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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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

The Week Ahead In VIX Futures - 5/7/13

Volatility futures across all months have been back on the decline at a fairly even pace since the spike in mid-April, as can be seen below (all charts from the VIX Futures Data page)

You can see that the overall spread and spacing between month 1 and month 7 has stayed pretty constant during this time, making for a consistent contango term structure.

You may also notice that the lines are more compressed during this time than they have been in previous months. This compression represents a flatter term structure, which can be specifically measured (using calculation of ln(M7/M1)) and plotted on the graph below.



It's another way of looking at how the slope of the term structure curve changes over time. The previous two graphs are on the same timeframe so you can directly compare what the slope looks like on days with a wide separation vs days with a narrow separation. For the past two weeks the slope of the term structure has stayed fairly constant in a pretty weak contango, with readings between 0.2 and 0.25.

I made a point about the flattening of the term structure last Wednesday as the slope reached 0.19 and the VXX Spike Risk gauge hit 5.8. The following day (May 2nd) the markets rallied and the term structure steepened back up, staying above the 0.20 mark which I find to be critical to maintain to keep inverse VIX products (XIV & ZIV) moving upwards.


So where does that leave us going forward? To answer that we move on to the Daily Forecast page.

Looking at the recent VXX Bias values, the time to look at going long XIV was when the VXX gauge crossed from  positive to negative bias on 4/17.

However, the value on the VXX Spike Risk gauge for the same day showed that the risk was a 7.3 (out of 10), indicating that VXX was very likely to see more upside:

As I noted in my recent post on using the forecast gauges, the bias is the best predictor for long term price movement while the spike risk is better for price in the next couple of days.  So according to the model, the best play was look to get long XIV was on 4/17 while VXX spiked (XIV dropped). Although because the risk gauge was elevated you want to manage that risk through either VXX call options or a smaller position until that risk gauge fell back below 5 (on 4/23). Note: Had the VXX Bias gauge turned back positive for the 4/18 forecast I'd look to exit XIV promptly.

As of today the bias remains negative for VXX so the best play is still long XIV / short VXX. The roll yield remains small, however, and the spike risk is a moderate 4.6. This is still reason for caution, and if you're not a position here already it's probably not the best time to jump in.

In terms of further downside for VXX over the next week, we're not yet in the basement as VIX could still push on down towards 3-month historical/actual volatility (HV63) which sits at 11.60, near the March VIX lows.


Looking at the ZIV forecast you can see that the bias remains positive although it appears that it could be slowing. I think this is another instance of something that is correct to stay in if you're in it, but not a great time to enter (also see the 2 year view of the ZIV bias if you haven't already).

Weekly Wrap 4/12: Easy Money

Pretty nice week for those owning XIV with a 8.8% gain.  Term structure and VIX declined substantially and remain in contango producing a roll yield over 2% per week for XIV and almost 3% for ZIV (see VIX Futures Data page).  View of the term structure week over week:

Looking Ahead:
Next Wednesday April VIX futures expire and all months roll forward. You can expect April VIX and spot VIX converge as we get closer to Wednesday.  Right now April is ~5% higher than VIX so there's some  premium left but not much. Don't expect disproportionate downward moves from VXX this time around.

We've been in a pattern in the market lately where it is ridiculously easy to make thousands of dollars just buying the dips of XIV in the morning and selling during the afternoon melt-up. Cash out and repeat the next day. Seems to be a common occurrence and everyone is on to it, making me wonder just how much longer that pattern will last. This is trend we are currently in and I choose to play along rather than try to short it, but I remain very cautious with what I hold overnight.

Checking in on the VXX Daily Forecast for Monday, we can see that it has changed very little over the past week due to a pretty consistent contango term structure and positioning of front month futures relative to VIX. The bias remains slightly negative after today, however the risk of a spike edged up a bit.

Weekly VIX ETF Performances vs S&P 500:
XIV:     +8.8%
ZIV:      +5.2%
VXX:    -9.2%
UVXY:  -17%
SPY:     +2.3%

The Week Ahead In VIX Futures

Very little changed on the week for VIX futures, with most months only gaining 1-2%. Spot VIX however came off its low of 11.05 last week and gained 22%. Week-over-week term structure (does not include March VIX futures which expired this week):

The term structure may look normal but if you consider the steepness of the curve you'll see it flattened a bit this week, down to just 4.5 points separating 1st and 7th month (from 5.8 points last week).  Month 1 to month 2 flattened as well, down to 1.25 points from 2.1 last week. This results in a relatively small positive roll yield in XIV, which by itself, isn't likely to get you very far.

Forward implied volatility remains reasonably priced relative to 1- and 3-month historical volatility, with a ~25% premium. From the VIX Futures Data page:

Of course most of next week's action will likely be influenced by the outcome of the Cyprus bailout negotiations. If they can reach a favorable outcome, VIX is likely to fall back toward 1- and 3- month historical volatility, currently near 11. There are many opinions on what will happen but I found this piece from the former Vice Chairman of Moody's to be particularly interesting.

Lastly, a chart of the intraday SPY arbitrage model from today. Model components broke from tracking the S&P's +0.8% move today, with treasuries and volatility remaining flat and high yield credit being sold.