5 Consecutive Closes Below 14 and 5 Year Low on VIX
Friday, 11 January 2013
Markets Sideways at 5 Year High
After the wild up and down swing at year end, the markets have been moving sideways in a narrow range just at the fresh 5 year high (highest since January 2008 and the same level as in September 2012). The bears have not been strong enough to close the New Year gap and the bulls have not been strong enough to take the market further beyond the new high, although there was some sign of strength at yesterday’s close. With 7 trading days behind us in 2013, S&P500 range has been mere 23 points (1449-1472), or 1.6%.
Implied Volatility Down and VIX in the 13’s
Many people have expected volatility to cool down after resolution of the fiscal cliff issue, but probably few have expected it to go down so much and stay so down for so long. The VIX (CBOE Volatility Index) was the lowest since 2007 intraday (13.22 on Wednesday) and closed only 0.04 above 5 year low close yesterday (13.49 vs. 13.45 on 17 August 2012).
5 Consecutive VIX Closes Below 14 and History
Between 20 June 2007 and 3 January 2013 (1,399 trading days) the VIX closed below 14 only four times. All these four occurred in August and September 2012.
Between 4 January 2013 and 10 January 2013 (5 trading days) the VIX closed below 14 five times – every day.
Between 21 September 2012 (the last sub-14 close in 2012) and 4 January 2013 there were 72 consecutive trading days with VIX close above 14.
Since 1990 there have been only 5 other occurrences when VIX closed below 14 for 5 consecutive days with more than 50 days since the previous 5 consecutive closes below 14. You can see them in the tables below, where you can also see what the VIX did in the days immediately following.
Days above 14 = number of trading days since the last (single) VIX close below 14
Days since last = number of trading days since the last 5 consecutive VIX closes below 14
As you can see, 5 consecutive VIX closes below 14 did not always mean that the VIX had to shoot up again – in fact, it was quite the opposite. Out of the 5 occurrences there were only 2 when the VIX returned above 14 some time during the next 7 trading days. In the 3 other occurrences the VIX did not get above 13.50 in the next 7 trading days, not even intraday (the second table). Interestingly, the 2 observations followed by higher VIX had longer periods of time since the previous 5 consecutive VIX closes, similar to the current one.
Of course the sample is very small and it is just an interesting observation rather than something to base trading decisions on.
VIX Futures Curve Steep
In line with the extremely low spot VIX and January VIX futures expiring in three trading days, there is little wonder that the futures curve is very steep. The market seems to not expect any major troubles for stocks in January (and experience from the last two years supports that view), but it is widely believed that concerns can return to the markets in February or March with a new debt ceiling debate. March VIX has been relatively strong in the recent days.