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Volatility Index (VIX) plunges to lowest levels since 2007

post #1 of 33
Thread Starter 

the vix (aka, fear index) has hit it's lowest intraday level today since may 2007... are we getting too complacent? hence it begs the question: are we nearing a market peak? as the 'ole saying goes- when the vix is low, it's time to go... are we there yet? vix hitting the mid 12's today down about 8% on the day! koolaid.gif

 

 

here is a nice chart that sje had posted in a thread last week showing what happens in the markets each time the vix gets down to these super low levels...

 

here's his chart and thread-

 

started by Gil Oren (1/7/13 at 4:07pm)

 

 

 

CBOE S&P 500 VIX Futures PricesFriday, Jan 18th, 2013

 

Current Prices  |  End-of-Day Prices  |  Options Quotes  |  Spread Quotes  |  Profile

 

 

 View Help
Contract Last Change Open High Low Previous Volume Time Links
VIY00 (Cash) 12.46s -1.11 13.52 13.53 12.29 13.57 0 01/18/13 quote_icon.gif chart_icon.gif opinion_icon.gif options_icon.gif
VIG13 (Feb '13) 14.65s -1.05 15.60 15.67 14.50 15.70 68,732 01/18/13 quote_icon.gif chart_icon.gif opinion_icon.gif options_icon.gif
VIH13 (Mar '13) 16.30s -0.70 17.03 17.05 16.15 17.00 41,679 01/18/13 quote_icon.gif chart_icon.gif opinion_icon.gif options_icon.gif
VIJ13 (Apr '13) 17.25s -0.65 17.90 17.90 17.15 17.90 15,488 01/18/13 quote_icon.gif chart_icon.gif opinion_icon.gif options_icon.gif
VIK13 (May '13) 17.85s -0.70 18.50 18.52 17.80 18.55 10,382 01/18/13 quote_icon.gif chart_icon.gif opinion_icon.gif options_icon.gif
VIM13 (Jun '13) 18.50s -0.60 19.10 19.12 18.40 19.10 9,649 01/18/13 quote_icon.gif chart_icon.gif opinion_icon.gif options_icon.gif
VIN13 (Jul '13) 19.15s -0.65 19.78 19.78 19.10 19.80 6,419 01/18/13 quote_icon.gif chart_icon.gif opinion_icon.gif options_icon.gif
VIQ13 (Aug '13) 19.80s -0.65 20.40 20.40 19.75 20.45 2,351 01/18/13 quote_icon.gif chart_icon.gif opinion_icon.gif options_icon.gif
VIU13 (Sep '13) 20.45s -0.60 20.80 20.86 20.45 21.05 177 01/18/13 quote_icon.gif chart_icon.gif opinion_icon.gif options_icon.gif
 

 

Quote:

VIX Slips to Lowest Since 2007 as S&P 500 Reaches Five-Year High

By Nikolaj Gammeltoft & Whitney Kisling - Jan 18, 2013 5:07 PM ET

The benchmark gauge for U.S. stock options fell to the lowest level since April 2007, slipping as profit growth and progress in raising the U.S. debt ceiling kept the Standard & Poor’s 500 Index at a five-year high.

The Chicago Board Options Exchange Volatility Index (VIX), or VIX, retreated 8.2 percent to 12.46 today and has tumbled 45 percent since Dec. 28. The only other time the volatility gauge has fallen that much over the same period was when it lost 45 percent through July 3, 2006. The index measures the cost of using options as insurance against losses in the S&P 500, which has risen 6 percent in three weeks.

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“The VIX is collapsing,” Alec Levine, an equity derivatives strategist at Newedge Group SA in New York, said in an interview. “Absent another debt ceiling fiasco, the implied volatility as seen in the VIX is falling to better reflect the actual realized volatility environment.”

The S&P 500 (SPX)’s five-day historical volatility, a measure of price swings, tumbled 95 percent from Jan. 3 to 1.37 on Jan. 16, its lowest level since 2005. The measure was at 3.92 today.

Speculation President Barack Obama and Congress would fail to reach a budget compromise sent the VIX up 27 percent in the last week of December. It reversed the gain in the first week of the year, sinking 35 percent between Dec. 31 and Jan. 2 for the biggest two-day drop ever, as politicians struck a deal.

While the VIX has lost 31 percent in 2013, the S&P 500 climbed 4.2 percent as earnings at companies from Goldman Sachs Group Inc. to Monsanto Co. (MON) exceeded estimates while housing starts and initial jobless claims showed the U.S. economy is recovering.

Stocks Advance

The benchmark gauge for American equity rose 0.3 percent to 1,485.98 today. Stocks rebounded from their lowest levels of the day as Majority Leader Eric Cantor of Virginia said in a statement that members of Congress won’t be paid if the House or Senate doesn’t pass a budget by the end of the proposed three- month debt-limit increase.

The Treasury Department has said the U.S. will exceed its $16.4 trillion borrowing authority sometime from mid-February to early March. Stocks fell earlier as consumer confidence in the U.S. unexpectedly dropped in January.

The VIX is 85 percent below its all-time high of 80.86 reached after Lehman Brothers Holdings Inc. declared bankruptcy in 2008. It is trading 39 percent below its lifetime average of 20.43, according to data compiled by Bloomberg.

Ownership of futures on the volatility index rose to a record last week. Open interest climbed to almost 450,000, eclipsing the previous high set in September, according to the CBOE Futures Exchange.

Surprising Decline

“The drop in the VIX has caught a lot of people off guard,” Ben Schwartz, the Chicago-based chief market strategist at broker Lightspeed Financial Inc., said by phone. “There’s still uncertainty surrounding the federal government and corporate earnings. The expectation was that we were going to see some volatility over the next 30 to 40 days.”

The S&P 500 should climb to 1,541 by the end of the year, according to the average forecast of 15 Wall Street strategists surveyed by Bloomberg. That’s up from 1,534 when the year began. More than half of the strategists predict the S&P 500 will exceed its all-time high of 1,565.15 reached in October 2007 by the end of this year, data show.

Corporate earnings for 2013 should climb to a record $110.10 a share, up 8 percent from 2012, according to more than 11,000 analyst estimates compiled by Bloomberg. Of the 67 companies that have posted results for the last three months, 48 have reported better-than-estimated profits, data compiled by Bloomberg show.

VIX Skew

Options traders have pushed the relative cost of protecting against S&P 500 losses near a two-year low. Puts with an exercise price 10 percent below the index level cost 8.19 points more than calls betting on a 10 percent rally, three-month implied volatility data compiled by Bloomberg show. That’s close to the 7.52 level reached on Dec. 12, which was the lowest since November 2010, according to the data.

“We find volatility for sale despite what will remain a contentious debt ceiling debate, a deepening recession in Europe, and what so far has been a mixed earnings picture,” Peter Cecchini, global head of institutional equity derivatives at New York-based Cantor Fitzgerald LP, said in an interview. “The beatdown in volatility, given the upcoming debt ceiling, is an opportunity to buy it.”

post #2 of 33

Lots of bullish bets on the February and March OTM VIX calls....

post #3 of 33
None of them are my bets, not yet. I look at it this way, VIX is so ridiculously low, it will be easy to bet on it rising more once it continues to rise... VIX bets are expensive, so being early could make a correct bet a money loser.
post #4 of 33
Quote:
Originally Posted by rando View Post

None of them are my bets, not yet. I look at it this way, VIX is so ridiculously low, it will be easy to bet on it rising more once it continues to rise... VIX bets are expensive, so being early could make a correct bet a money loser.

 

Timing doesn't have to be perfect on the VIX because assuming they do decay and the VIX shoots up then it will increase the premiums twice as fast because of the obvious volatility gain.... and not twice as fast, just saying lol

post #5 of 33

With the VIX this low, this is extremely scary, but the path of least resistance is still higher :P

post #6 of 33
Thread Starter 
Market Direction – VIX Index Says Stop Worrying – Should You? (Click to show)

 

 
market-direction-stop-worry

Market Direction on Friday continued along the path of least resistance which is now up. The Dow and the S&P 500 broke through resistance on Thursday Jan 17  and on Friday Jan 18 2013 the market direction continued to move higher. It took five years for stocks to recover to this point but for many investors the severe bear market of 2008 to 2009 is still fresh.

Daily I receive emails from readers who are still trying to piece together retirement funds as many are still in homes that have tumbled in value and many more are holding large losses from the bear market and have not gone back into stocks. With the market direction continuing to move higher almost daily now and more stocks making 52 week highs, those on the sidelines are worried they are missing out and those in the markets are worried they are being suckered once again to enter the markets at what could be a top.

But understanding market direction and knowing the warning signs of when to leave the party are available. Perhaps one of the simplest market timing tools that has been effective for over 25 years is the VIX Index.

Market Direction and The VIX Index

The VIX Index which measure the volatility within the markets hit an intraday low on Friday Jan 18 2013 of $12.29. The VIX Index with its low valuation is telling investors to stop worrying and put their capital to work. But should you?

Below is the VIX Index chart from January 2008 to January 2013. Since the incredible volatility at the height of the bear market of 2008 to 2009 stocks have clawed their way back. Not all stocks have participated mind you and many are still far below their lofty heights of 2007 but overall the VIX Index has been on a steady if sometimes rocky road to finally fall to $12.29 and close at $12.40 today as the S&P 500, Dow and NASDAQ have recovered almost all the losses of the last bear market.

VIX Index Market Direction

VIX Index Market Direction

Market Direction and 10 Years of the VIX Index

It has been a long time since the VIX Index was this low. We have to return to Jan 2007 to see the VIX Index at levels such as today when the VIX Index actually fell below $10.00.

Market direction and VIX Index 2003 - 2013

Market direction and VIX Index 2003 - 2013

Contrarian Signals from the VIX Index

There is a belief among investors and analysts that low volatility levels within the VIX Index are actually signs of trouble ahead and indeed there does appear to be some truth to this anomaly since in the past each time when the VIX Index signaled low levels of volatility the market direction turned from up to down. At times when the VIX Index signaled low levels of volatility and market direction did not change from up to down, the market direction did become more erratic leading to whipsaws in the stock markets and a return to higher volatility.

But the question investors need to ask is whether they could have stayed invested and made a profit. The answer has always been yes,  that low volatility valuations in the VIX Index correlate to rising market direction prices in the underlying indexes. Therefore staying invested as volatility falls has been the right strategy.

20 Years of Market Direction and the VIX Index

If we study the VIX Index over the past 20 years from February 1993 to January 2013 there have been only a handful of periods when the VIX Index entered low levels such as those seen on Friday Jan 18 2013. The weekly VIX Index chart from 1993 to 2012 is below. I have marked the past 3 periods in history when the VIX Index was this low.

vix-index-20-years

Period A: 1993

Over the past 20 years, the 1993 market stands out as having low volatility for the entire year. The blue line is at $12 on the VIX Index. You can see that for the entire year volatility failed to climb back above $20. You can also see that for 50% of the year the VIX Index registered at or below $12 indicating very low levels of volatility.

period A VIX Index

VIX Index Period A - 1993

The S&P 500 during that period returned 7.5%. While not spectacular investors who bought the index in January 1993 made profits by year-end.

market direction in 1993

Market direction in 1993 returned 7.5% on the S&P 500

Period B 1995

In 1994 volatility stretched from a low of around $10 up to $28 but by 1995 the VIX Index again spent half of the year at or below $12.

Period B 1995

Period B 1995

During this period from 1995 to January 1996 the S&P 500 has a spectacular run returning 39% for the year in what was almost an entire year of the market direction moving relentlessly higher.

market direction 1995 to 1996

Market direction from Jan 1995 to Jan 1996 1993 returned 39% on the S&P 500

Period C 2005 – 2006

The final low volatility period during the past 20 years was the recovery from the 2000 to 2003 bear market. This severe bear market which lasted almost 3 years saw VIX Index levels as high as $48. The stock marketrecovery which commenced in 2003 saw volatility levels decrease until by early 2005 the VIX Index was regularly at or below $12. This low volatility level persisted until the end of 2006 when volatility again began to rise in the stock markets and there were no further periods of low volatility until this past Friday’s reading of a low of $12.29.

Period C

Period C 2005 - 2006

During this period from Jan 2005 to January 2007 the S&P returned 23% as again market direction remainedmoving higher throughout the two years,

Market direction 2005 to 2006

Market direction from 2005 to 2006 returned 23% on the S&P 500

Extended Low Volatility Time Periods

Therefore while many investors and analysts believe that low volatility levels are followed by a return to higher volatility, there are periods of low volatility that can last for more than a year as we have seen in the above examples.

When volatility is lower Put Selling to avoid assignment becomes more difficult to earn high option premiums. It makes sense really. If stocks are less volatile than they move around a lot less. This means option premiums are lower simply because the stock does not fluctuate as widely as it did during periods of higher volatility. Spreads tend to also have poorer returns again because volatility is so low that option premiums are poor. Iron Condors, Butterflies plus other option trades that have more than one position to manage also need to be more careful at the trades being placed, to keep them profitable despite the lower premiums being earning.

VIX Index Is Low – Should You Be Worried?

So should you be worried? I see no reason to be worried about the low volatility in the S&P 500 at present. Whether volatility climbs higher from here or continues lower, I am betting on lower volatility until we see what happens with the debt ceiling debate. When investors are concerned volatility rises. It really is that simple.

I believe the VIX Index can however be used to advise when you should become worried and when you should keep your capital in the markets. With the VIX Index pushing lower and hitting $12.29 on Friday intraday, many analysts point to it and are warning that the complacency in the markets means the highs we are seeing won’t last long. But I believe they have no way of knowing this and the VIX Index does not represent complacency.

Here is how many investors use the VIX Index to time the market direction and to know when to get their capital back out of the market or at least buy some protection for a downside swing in the market direction.

Using The VIX Index To Time The Market Direction

To understand the VIX Index as a market timing system, you have understand that the VIX Index is not telling you what tomorrow will bring. It is telling you what the next 30 days may bring. Let’s understand the VIX Index a little better to understand how to use it to time market direction and tell investors when to worry and when not to.

Understanding The VIX Index

The VIX is an index on the Chicago Board of Exchange which is measuring and predicting the expected level of volatility in the US Stock Market (primarily the volatility in the S&P 500) for the next 30 days. While many investors think it is reflecting “today’s” volatility, it is actually predicting what level of volatility to expect over the next 30 days. This is why the VIX Index is so handy to have around.

Many investors consider the VIX Index a “fear indicator”. There is good reason to consider it as such. When the market is in a downtrend, a correction or a period of uncertainty or concern, the VIX Index will reflect the fear or concern of investors shown by the VIX Index rising in value. When stocks plunge volatility moves up. When the market is in an uptrend or there is less uncertainty in the market, the volatility subsides. This is also reflected in the VIX Index as the index will decline.

So it isn’t complacency that is being measured but the selling pressures within the markets which in turn is measuring investor worry. Even when markets are falling investors can be complacent but when they are busy dumping shares the fear or level of concern is being reflected in the VIX Index rising in value.

The 20 Factor in the VIX Index

The VIX Index has been around a long time. I have used it since 1986 and indeed in 1987 the VIX Index hit an all-time high of 172.79 when the stock markets crashed over 25% in one day. So while we believe that the 2008-2009 bear market and the financial panic saw incredibly high levels of volatility, which they did, the VIX Index in October 1987 was almost double the levels seen in the 2008-09 bear markets because investors were dumping shares at an amazing pace.

VIX Index Oct 1987

VIX Index Spike of October 1987

Over years of studying the VIX Index and market direction investors and analysts have come to believe that the $20 level on the VIX Index is the region to become concerned. Following various studies of market charts, it became obvious that when the VIX Index moved above $20 it almost always signaled that the S&P 500 would correct further. This became the level at which investors could consider purchasing protection. Anywhere below $20 was considered normal volatility with less chance of the market correcting severely. Severely being defined as more than 10%.

When the VIX Index fell below $14 it was considered a good sign that the S&P 500 would advance higher and the risk of a correction of more than 5% was almost unheard of.

Below $12.00 market direction in all the indexes almost always rose.

Simple And Effective Market Timing System

The VIX Index has proven over the course of 25 years that it is an excellent market timing system to determine market direction. Therefore with the VIX Index almost at $12 on Friday Jan 18 2013, it would appear that investors should indeed stop worrying and get their capital back to work in the S&P 500.

My Opinion on the VIX Index?

In closing I just want to add that I do not use the VIX Index as a market timing system, but I do check it daily and compare what it is advising against my preferred method of the moving averages. I prefer the 50, 100 and 200 day moving averages for market timing. That said, the VIX Index has a proven track record of being right and for most investors it makes a great guideline to know when to keep your capital in the stock markets and when to get your capital out.

 

post #7 of 33
Thread Starter 

fresh new lows on the vix here... we're now sitting at levels not seen since february of 2007! i don't know about y'all but this thing looks bearish all the way down to at least the 10's... if not, dare i say it, the single digits, 9-handle... i'm not sure if we get there this month or what... but, wow was that ever a massive move down we had yesterday. -8%

 

x1g7pl.png

 

Quote:

Who’s afraid of an S&P 500 triple dip?

March 11, 2013, 6:06 PM

The stock market hasn’t been this carefree since early 2007. Should we be worried about that?

As the S&P 500 Index moves toward an all-time high and volatility sits at multiyear lows, investors should remember we’ve been here twice before, with the index just below 1,600 both in 2000 and 2007 only for it to take a dive soon after.

So is a third dip on the horizon? Or will the U.S. stock benchmark power to a record?

There are similarities between those times and  now.

For instance, on Monday, the CBOE Volatility Index VIX -8.18% closed down 8.2% to 11.56, its lowest level since Feb. 26, 2007, when it closed at 11.15. The so-called “fear index,” which saw a brief surge in February of this year, is currently down 36% year to date.

Also on Feb. 26, 2007, the Dow Jones Industrial Average DJIA +0.35% closed at 12,632.26 and had another 12% to gain until it ran out of gas less than 6 months later. Similarly, the S&P 500 Index SPX +0.33% closed at 1,449.37, and had another 8% to run-up before it tanked.

The multiyear low in volatility coincides with the Dow industrials closing up for a seventh-straight day Monday, its longest streak in a year and a fifth consecutive record close. The S&P 500 was also up for the seventh-straight day, closing at 1,556.22, just 9 points shy of its all-time high.

Also raising suspicions about the current rally is that it’s being  supported by fairly low-to-average volume levels. On Monday, NYSE-listed shares topped a composite volume of 3 billion, with Nasdaq-listed shares at 1.6 billion. March volumes are about 8% below year-ago levels, and composite average daily volumes have run around 3.6 billion for NYSE-listed stocks and 1.9 billion for Nasdaq-listed ones year to date, according to Barclays.

“It might be emotionally difficult to buy when fear reigns, but it usually proves profitable,” said ConvergEx Group in a recent note. “Conversely, putting new money to work when complacency rules — as it does now –- is seldom a recipe for success.”

Source: FactSet

The multiyear low VIX was just one of a list of stock cons from ConvergEx. Others included:

  • The Federal Reserve is partially responsible for current market levels with its $85 billion a month in asset repurchases, encouraging investors to put their money in riskier assets.
  • The current unemployment rate of 7.7% is much higher than it was over the past two S&P 500 peaks in 2000 and 2008, when it was 3.9% and 4.7%, respectively.
  • Annual GDP growth is at a sluggish at 0.1% at the latest reading, compared with the average of 3.1% a year from 1950 to the present.
  • Troubles in Europe are still far from over: Euro zone GDP contracted 0.9% in 2012, unemployment is on the rise,  and retail sales and household spending are down.

On the other hand, ConvergEx sees pros outweighing the cons with five other factors acting in favor of stocks:

  • Mergers and acquisitions spending is up to $219 billion so far this year, compared with $85 billion in the comparable year-ago period.
  • Corporate profits are also up and analysts generally don’t believe the sequester will significantly harm them.
  • The rolling 5-year return on the S&P 500 supports “buy low, sell high,” with a current 16% return, compared with an average 5-year return of 47.2% over the past 50-plus years.
  • While financials, the traditional rally leaders, are sluggish other cyclicals like consumer discretionary, technology and industrials have posted substantial five-year gains.
  • Consumer spending is still doing well despite weakness in the labor market. Although retail sales numbers on Tuesday will give a better read on current consumer spending.

 

post #8 of 33

quadrupling down on tvix

(no jk for u noobs out there)

post #9 of 33
Quote:
Originally Posted by tones View Post

quadrupling down on tvix

(no jk for u noobs out there)

 

 

No disrespect, but you're not worried about decay on that sucker? The longer you hold that, the more it's going to work against you.

post #10 of 33
he said he is just kidding.
post #11 of 33
Quote:
Originally Posted by rando View Post

he said he is just kidding.

 

Ok, I thought no j/k = not joking. These internets are confusing me.

post #12 of 33

rotfl.gif

post #13 of 33

Hey that's what I thought too "no jk" = !jk

post #14 of 33

no jk means he is not joking.

 

Source: Im an expert at internet

post #15 of 33
post #16 of 33

unless he comes back in here and tells us, we really don't know 100%....I think Rando is right but I could be wrong...eek.gif..

post #17 of 33
Thread Starter 

 

laughing.gif tongue.gif

 

lol @ this thread... i agree with rando/oldie... knowing tones (aka, hsm's funnyman) i'm willing to bet that he was just being facetious... but as oldie said, we won't know for sure unless he chimes back in here and tells us...

post #18 of 33

Lol, this thread sure got derailed. You know what would have solved this whole problem before it began? A comma.

post #19 of 33

well, tomorrow if he shows us one of these, we'll know:

 

banana.gif

 

mad.gif

post #20 of 33
Thread Starter 

lol... also i just gotta say it's really great to see you back posting on the main section here (weekly threads, etc) again, simon! your posts been missed big time 'round here bud! thumbup.gif

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