Wednesday, May 28, 2014

VIX Breaks Year-Old Support With Implications Immediate and Longer-Run

It has been over a year since the VIX formed a bullish window that has provided support in all but the most recent pull-back in volatility.  Last year and earlier this year we found opportunity to trade VIX based on the expected support at the window support of 11.52.  The settlement below this level on Friday and again on Tuesday reduces the value of this support level, but also gives us some information. 

First, at no time since March 15, 2013 have market participants collectively been as complacent about the prospects for a steady state in equities.  The chief source of support for that conviction is likely the Fed which has provided ample justification to expect no negative surprises on monetary policy.  We need only look to mid-2013 when Bernanke floated the notion that the Fed would likely begin to reduce (taper) the amount of securities purchases by year-end to see what equity markets thought about that ‘surprise’.  The VIX jumped to an 18 month high following that news.  

Over the longer-run, I see the slide in the VIX below the old window support as constructive for equities and likely indicating a longer period of grinding and less impressive gains than seen over the last two years.   More immediately (1 week-14 days) we should be prepared for a spike in VIX to as high as 17.  My confidence is higher for the longer-run scenario, but I am still somewhat keen on the prospects for more immediate disquiet before loner-run calm.   

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