VIX at Pre-Pandemic Levels, Summertime Volatility Possible?
As the S&P 500 marches on, the VIX is trading at pre-pandemic levels. Will the fear index remain subdued all Summer, or could a return of volatility be in the cards?
Get Our Activist Investing Case Study!
Get the entire 10-part series on our in-depth study on activist investing in PDF. Save it to your desktop, read it on your tablet, or print it out to read anywhere! Sign up below!
Q1 2021 hedge fund letters, conferences and more
S&P 500 Upside
Last week seemed to be one of those weeks where the market could do no wrong . After digesting the previous week’s interest rate stance changes from the Fed, the S&P 500 just kept climbing and climbing last week, reaching all-time highs once again. Weak economic data print via Flash Services PMI? No problem; market higher. Unemployment Claims printing higher than expected? Also, no problem. Weak New Home Sales print? The market said no problem. The S&P 500 had plenty of upside to get last week, and it got it. What about this week?
Figure 1 - S&P 500 Index March 13, 2021 - June 25, 2021, Daily Candles Source stockcharts.com
Towards the end of last week, we had two gap higher opens in a row; on Thursday and Friday. At the same time, we really do not have an extreme overbought condition via RSI(14), with the reading at 62. We closed at all-time highs on Thursday and Friday, and things have been looking rosy for the bulls.
So, while we were having these strong up days at the end of last week, I started watching the $VIX intraday, looking at not only the cash $VIX; but the front-month VX futures as well. I indeed noticed a solid bid under the market (especially in the VX front-month futures). While the volatility was still lower, there was indeed some bid to the market; you could just feel it and see it by watching. So, let’s take a look at the $VIX :
Figure 2 - $VIX Volatility Index December 9, 2019 - June 25, 2021, Daily Candles Source stockcharts.com
Inverse Correlation Between The S&P 500 And The Volatility Index
Above, we see the $VIX at its pre-pandemic levels and our current levels. What caught my eye last week (especially on Thursday and Friday) was the bid under the Volatility Index, even as the S&P 500 advanced higher and made all-time highs on gap-up days.
While the $SPX and $VIX do not have a 100% inverse correlation, they are certainly inversely correlated for the most part. Let’s take a more zoomed-in look at the daily price action late last week:
Figure 3 - $VIX Volatility Index May 5, 2021 - June 25, 2021, Daily Candles Source stockcharts.com
Divergences like we see here really capture my attention. Clearly, there was a bid under the Volatility Index last week, even as the $SPX was trading new highs.
It only makes sense. Money managers of all kinds are wise to use all-time highs to hedge portfolios by purchasing protection in the form of $VIX calls when volatility is low. Could this be a prelude to things to come over the Summer? What do you think?
It seems that we are at an “in-between” point of some sorts. While the $SPX is not flashing any extremely overbought technical warning signs, it has risen quickly from its 50-day moving average. Combining that fact with the price action in the $VIX last week, it all paints an inconclusive picture for me at the moment.
I think it is wise to be in tune with the state of the $SPX and $VIX ; and their relationship with one another.
This week, we have the big Non-Farm Payroll data on Friday, and the market will be waiting for that data. The above-described divergence could be a sign of overall sideways price action heading into the number on Friday.
Now, for our premium subscribers, let’s examine the nine markets that we are covering. At least one of them is primed for an exit today, so let’s dig right into it. Not a Premium subscriber yet? Go Premium and receive my Stock Trading Alerts that include the full analysis and key price levels.
Thank you for reading today’s free analysis. I encourage you to sign up for our daily newsletter - it's absolutely free and if you don't like it, you can unsubscribe with just 2 clicks. If you sign up today, you'll also get 7 days of free access to the premium daily Stock Trading Alerts as well as our other Alerts. Sign up for the free newsletter today!
Thank you.
Rafael Zorabedian
Stock Trading Strategist
Sunshine Profits: Effective Investment through Diligence & Care
This content is for informational and analytical purposes only. All essays, research, and information found above represent analyses and opinions of Rafael Zorabedian, and Sunshine Profits' associates only. As such, it may prove wrong and be subject to change without notice. You should not construe any such information or other material as investment, financial, or other advice. Nothing contained in this article constitutes a recommendation, endorsement to buy or sell any security or futures contract. Any references to any particular securities or futures contracts are for example and informational purposes only. Seek a licensed professional for investment advice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Information is from sources believed to be reliable; but its accuracy, completeness, and interpretation are not guaranteed. Although the information provided above is based on careful research and sources that are believed to be accurate, Rafael Zorabedian, and his associates do not guarantee the accuracy or thoroughness of the data or information reported. Mr. Zorabedian is not a Registered Investment Advisor. By reading Rafael Zorabedian’s reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Trading, including technical trading, is speculative and high-risk. There is a substantial risk of loss involved in trading, and it is not suitable for everyone. Futures, foreign currency and options trading contains substantial risk and is not for every investor. An investor could potentially lose all or more than the initial investment when trading futures, foreign currencies, margined securities, shorting securities, and trading options. Risk capital is money that can be lost without jeopardizing one’s financial security or lifestyle. Only risk capital should be used for trading and only those with sufficient risk capital should consider trading. Rafael Zorabedian, Sunshine Profits' employees, affiliates, as well as members of their families may have a short or long position in any securities, futures contracts, options or other financial instruments including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice. Past performance is not indicative of future results. There is a risk of loss in trading.
The post VIX at Pre-Pandemic Levels, Summertime Volatility Possible? appeared first on ValueWalk.
Source valuewalk