The VIX Is Low, So What?
Bob Lang | Jun 04, 2017 03:45AM ET
f you watch the business channels or read the financial pages you will find the big story is how low market volatility (VIX) is currently, and that such a low number (which is kinda rare) is not healthy for markets. From a technical point of view, this is not accurate. In fact, a low VIX means stocks can continue to rise.
It is when the VIX is in an uptrend that markets tend to be in trouble But if you follow trends as I do, then looking at the longer term timeframes we see the continued pattern of lower highs and lower lows, which portray a bearish trend for volatility. Even the brief spikes on this monthly chart which showed panic were just more great opportunities to get on board the market. This is a major sentiment reading for markets, big institutional investors rely on VIX and other tools to help determine the timing of placing money in markets.
So, is it safe to get back in the water with the VIX around 10%? The perception in the business media is for a potentially dangerous condition. Remember just a few weeks ago when VIX was hovering around this same level, and markets were hammered. The bulls were trounced, the VIX rose 43% that day, the seventh biggest move in history.
Yet, much of that loss was recovered within a few days, and just a week later the SPX was rising past the old highs and is higher still. That was an opportunity, but as short term as any we have seen of late - only one day! Like endless others, if you blinked, you missed it.
History shows low volatility is not sustainable, eventually buyers exhaust and then all we have left are sellers. The idea here is to buy protection as price ranges widen, markets move sharply in both directions, with more volatility prices tend to move down with more vigor. Further, low market volatility means option prices are cheap, so buying protection for a portfolio by using puts or selling calls is an inexpensive means of buying insurance (in case of a disaster).
While the obsession over a low VIX have many concerned, we are not all that worried yet. That is because the term structure that is more important. This is simply a plot of all the future volatility months out in time. We consider an upward sloping curve such as we have now to be a bullish market construct. You can see that here below on the link to trading volatility.net .
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