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

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.

When XIV Loses Its Edge: Getting Into Defensive Mode

Actual market volatility has clearly picked up over the past month as the broad market tests both upper and lower ranges to figure out the next major direction.

As I discussed in our members' forum post on 6/14, I expect choppy conditions and urge caution for XIV longs over the next few months. During this time there will be streaks of days where VXX will gain and streaks when XIV will gain, but over the course of weeks I tend to think the wide price swings will prevent either of these from really going anywhere. 

Overall the volatility futures market is not sending very positive signals, as we can see from the data on our VIX Futures Data page.

The premium of front month VIX futures to VIX has been decreasing (a concept I outline here):

The slope of the term structure is flattening (which I define as important here):

I think there are still opportunities to make money by trading XIV and VXX in these swings but it requires a more active trading strategy with shorter hold times (a few days), and use of smaller positions since trends will be unpredictable. The VXX bias remains small meaning that the "edge" in trading these products is mostly gone for now, so trading these swings also requires a bit of luck as it ultimately becomes a guessing game for the next direction -- a strategy that is not usually profitable.

I'm inclined to keep a good amount of my portfolio in cash and put some money in ZIV where the price swings are smaller, as long as the bias forecast is positive and I can still get a decent roll yield.

Picking up some VXX here is very tempting as I think there is a good chance it heads higher over the next few months, but again I think in the short term it will see some wild swings so I prefer to wait until there is a positive bias behind it even if it means missing out on some of the gains.

VXX Continues To Drive Upward

VIX and VXX continued their upward trend today with the VIX futures term structure flattening substantially, making it impossible for XIV and ZIV to make any upward progress.

We've been playing in the danger zone ever since the VXX Spike Risk gauge from our Daily Forecasts moved above 5.0 on 5/28, with VXX +16% since then. The flattening of the term structure today marks another possible shift in sentiment and puts the curve at risk of flipping to backwardation.

We're at a point where it is critical that...

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