Tuesday, 21 January 2014

When will the VIX break higher?

Since the equity low of sp'1074 in Oct'2011, the VIX has seen a very steep decline from a spike high of 48 to the 11s. The US market remains at a very high level of complacency. Yet, as 2004-07 showed, the VIX can indeed remain at such low levels for a fair few years.

VIX, monthly'1, 9yr

VIX, monthly'3

SPY/VIX ratio, weekly, 10yr


Chart monthly'3, is not something I've posted before. I should note first, its just one of a number of scenarios. This particular outlook is based on the notion that we will see broad equity gains into late 2015/early 2016.

However, even though the broader trend in equities could well be higher for another few years, that sure doesn't mean the VIX won't at least briefly spike into the 20s..or beyond. 

Just consider the following

VIX spike highs...

2008: 89
2009: 57
2010: 48
2011: 48
2012: 27
2013: 21
2014:  ?

Frankly, even I find it incredulous to imagine the VIX not breaking >20 this summer/autumn. Consider the duration of the rally from Oct'2011,  we are now at month 28, I have to believe we'll see some increasing market volatility this year. The SPY to VIX ratio is at pretty crazy high levels, and we're more than due for some significant degree of equity drop.

As ever..the only issue is how high?

A fair few chartists/commentators out there are seemingly agreed - if from very different perspectives, for some sort of equity intermediate top this summer/autumn, with a decline of something in the region of 20%. I'm certainly still on board with that outlook.

So, I certainly would see VIX in the 20s this year, but really, things only get real interesting if we see a break >30. The 40s will be a tough struggle, even if the market has fallen to the low sp'1600s. After all, who won't be buying the market then?

The summer/autumn correction

For the equity bears out there, one thing to keep in mind this summer...and early autumn. If we do see a significant drop in equities...and a spike in the VIX, is that it sure won't last long. The subsequent rebound in the market (if Yellen goes nuclear with the PRINT key), will likely re-crush the VIX back <20, where it might remain for another 12-18 months.

As I have noted a fair few times, in many ways, 2014 could prove to be a really messy year for most traders. The bulls might get rattled for the first time in over two years, with the equity doomer bears making huge short-side gains, only to get nailed on a subsequent renewed equity hyper-ramp.

Back at the Tuesday open :)

Goodnight from London

Video from Gordon T Long

Interesting discussion, for those with an interest in the bigger issues.