Third 2013 Correction, Only Modest Rise in VIX, Little Increase in VIX Futures, and Fall in VVIX

Thursday, 30 May 2013

Equity Rally Taking a Pause

In the last several days we have seen a pause in the equity rally, only the third year-to-date that is at least somehow visible on the charts. It all started with the “Bernanke reversal” last Wednesday. So far the extent of this correction has been comparable to the previous two small corrections (end February and mid April).


If everything goes according to the same scenario (in terms of correction length and size), the markets should resume the uptrend very soon and probably rise into the end of this week. However, there are a few reasons why this time may be different, including the main trigger topic being very sensitive (possible QE reduction and its timing) and the higher volatility in some non-US markets, particularly Japan (VNKY, which is Nikkei VIX, has closed above 36 for 6 consecutive sessions). Of course, I have no ambition predicting S&P500 direction, let alone QE and Japan newsflow.

VIX Out of the Narrow Range, Now 14-15

The VIX has broken out of its previous tight range as expected, but the increase has been very modest so far compared to the two previous spikes. This time it has not closed above 15 yet and it has not traded above 16 intraday.


Not Much Change in the VIX Futures Curve

VIX futures curve

The week-to-week change in VIX futures has been even more subtle than the increase in spot VIX. It would even seem that VIX futures almost completely ignore this equity correction. Nevertheless, in the last week’s post I have commented that VIX futures had diverged from the spot VIX to the upside, as if the futures markets had anticipated the rise in VIX. So now the spot VIX may be just catching up.

This is nicely visible on the chart of VXX (below). Notice how the current increase has been much smaller than the spikes in February and April. Also see that while the VXX was falling in the days and weeks before the previous two spikes, in May it was trading mostly sideways in the 18-19 range, as the strength in VIX futures compensated for the roll cost.


It is the same on UVXY and the other VIX futures based ETFs/ETNs.


VVIX Diverges from VIX, This Time to the Downside

There is an even greater divergence between the spot VIX and VVIX, which was falling in the last 4 trading days. It reached its peak (93.71) on Thursday shortly after open and has lost about 12 points since that time. Yesterday it closed lowest since 10 May (VIX was below 13 on 10 May). Like VIX futures, VVIX was rising while spot VIX was sideways before the current VIX spike.

VVIX measures implied volatility of VIX options in the same way as the VIX measures implied volatility of S&P500 options. Most of the time VIX and VVIX tend to move in the same direction, although that is far from being a rule.