The Naked VIX

To close today, lets try something a little different. No annotations, no lines, just a pure VIX chart covering the last five years of craziness.

Have a good long stare at this for a few minutes...and ask yourself one thing, when is the next explosion in volatility due?


VIX, weekly, 5yr

Summary

A few initial things that we can note.

1. We are without question at the low end of the VIX trading range. We really don't go much lower than current levels.
2. We've not seen a decent VIX explosion in over a year, we're kinda due for one.
3. VIX 50 has not been seen since the March 2009 lows. The most recent two explosions failed to breach the big 50. If 50 is broken at ANY point in the coming months, it will be the ultimate warning of a real risk of system-failure.
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So, when will the VIX next explode higher?

A parallel to August 2008 - if you look at the pattern from May-August 2008, it is arguably very similar to March-August 2012.

I guess any doomer bear could justifiably argue that, but there sure doesn't seem any bearish momentum/energy out there right now. I certainly remember summer 2008, and there was a pretty different mood in the air back then. Even though I believe the US economy will formally slip into a recession no later than Q4 (which of course won't be confirmed until late April 2013), I find it difficult to imagine a VIX exploding beyond the low 40s this Autumn.

Regardless, considering the uncertainty in the global economy - and the low level of the VIX itself, picking up a few blocks of VIX calls sure look like a reasonable trade/insurance policy against market downside.

*VIX December Calls, $40 strike for $100 a contract, seem a very attractive strike level, with plenty of time on the detonator clock.
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As for Friday, we have bullish pennants on the hourly index cycles, so we're more likely to gap open a little higher, 1410/12. Bears really need to see a good reversal day, a swing from 1410, with a close of 1395/90 would make for a really nice turning point.

Goodnight from London

Daily Index Cycle update

A mixed day for the indexes - even though it felt like we closed broadly flat.


IWM

Sp,daily5b

Transports

Summary

The Rus'2000 index had some moderate gains today. However, the R2K is still below the early July highs, and it is indeed the case that the Rus'2000 small cap index acts really weird a lot of the time. It ramped hyper-fast after the June low, but saw a major pullback..whilst the other indexes have now caught up.

The Sp' remains in a broad uptrend too. The attached chart highlights a new idea, but only have low confidence in at present. We saw a similar H/S formation a few weeks ago, only for Mr Draghi to open his mouth that Thursday morning and ruin it!

The old leader - the Tranny, had a pretty poor day, and lost 0.5%. Again, it has to be asked, is the old leader warning of underlying systemic problems?

Bulls have to answer the question, how can you have an economic recovery if the transportation sector - the very foundation stone of the modern economy, is not recovering?

One final piece to post up later...

Volatility coiling up for a jump

The VIX again closed a touch lower, but its a clear wedge, and at least a mini snap higher is due in the coming few days. Of course, even a 10% jump would only get VIX to the high 16s. Great huh ?

As I regularly note, a VIX under 20, means any index declines are to treated with great caution. Remember that Monday a few weeks ago, where we opened with VIX +26% to 20, and dow -239, it sure didn't close that way.


VIX'60min

VIX, daily

Summary

There a few out there touting 'VIX to hit 10...or even <10' in the coming months, I'm not one of them. Even if the main indexes break >1422, I can't see VIX that low.

It remains a remarkably cheap time to buy VIX calls, as ever..timing is everything, and besides, whilst the main index trends are UP, its still kinda risky.

More to come!