The Year in VIX and Volatility (2015)

Every year one of my most-read posts is my annotated overview of the year in VIX and volatility.  Now that I have been doing this for the past eight years, the aggregated view of volatility from 2008 to the present makes for a fascinating concise history not just of volatility, but more broadly of the financial markets and of economic activity in general.

The graphic below captures most of the highlights from 2015 and from a volatility perspective, it was a year for the record books.  During August we saw the largest one-week VIX spike (+113%) that resulted from unprecedented back-to-back days of VIX spikes of more than 45%!  The cumulative jump in the VIX pushed the VIX to a high of 53.29 – the only time outside of the 2008-09 financial crisis since the launch of the VIX in 1993 that the VIX has topped 50.

[source(s): VIX and More]

While most investors pointed to China as the proximate cause of the record VIX spike(s), a VIX and More fear poll one week after the big VIX spike also highlighted “market structural integrity (HFT, flash crash, exchange issues, etc.)” as almost on par with China concerns, with “market technical factors (breach of support, end of trend, etc.)” not that far behind.

The balance of the year saw a wide variety of events that moved the markets, including the Fed’s first rate hike in nine years; crude oil plummeting to $34/bbl.; shock waves in the high-yield bond market due to low oil prices; chilling terrorist attacks in Paris and in California; Puerto Rico announcing it will default on some of its debt; turmoil in the currency markets when the Swiss National Bank ended the peg of the Swiss franc to the euro; a dramatic boom-bust cycle in Chinese A-shares – and a flurry of ineffective interventions on the part of the Chinese government to restore stability; a proxy war between Saudi Arabia and Iran in Yemen; and the European Central Bank committing to $1.2 trillion of quantitative easing.

As noted previously, even with all of the volatility, Every Single VIX ETP (Long and Short) Lost Money in 2015.

Finally, since 2011, I have been maintaining a proprietary Macro Risk Index that measures volatility and risk across a broad range of asset classes, including U.S. equities, foreign equities, commodities, currencies and bonds.  In 2015, the Macro Risk Index was consistently higher than it has been during any year since the 2011 inception.

What does high volatility in 2015 mean for 2016?  During the past two weeks, Barron’s published two opposing (but not necessarily inconsistent) perspectives on volatility in 2016.  For the case for rising volatility and what to do about it, try Jared Woodard’s Prepare for Rising Volatility in 2016.  I provide the contrarian point of view in The Case Against High Stock-Market Volatility in 2016.

Related posts:

• The Year in VIX and Volatility (2014)
• The Year in VIX and Volatility (2013)
• The Year in VIX and Volatility (2012)
• The Year in VIX and Volatility (2011)
• The Year in VIX and Volatility, 2010
• Chart of the Week: The VIX and Volatility in 2009
• The Year in Global Volatility (2008)
• Last Two Days Are #5 and #6 One-Day VIX Spikes in History
• China Growth and Market Structural Integrity Top List of Fear Poll Concerns
• Every Single VIX ETP (Long and Short) Lost Money in 2015

Disclosure(s): net short VIX at time of writing

Fiscal Cliff Continues to Top Fear Poll

In a week in which there appears to have been little progress in the U.S. fiscal cliff negotiations, investors continue to cite the fiscal cliff as the largest threat to the stock market in the VIX and More weekly fear poll. Fears related to government and politicians beat out concerns about excessive central bank intervention as the #2 issue, while anxiety related to the European sovereign debt crisis finished in a tie for fourth.

The poll marked only the third time in nine weeks that U.S. and non-U.S. respondents agreed on the top threat and was the first time that U.S. and non-U.S. respondents placed the top two threats in the same order. In fact, agreement on the order of the threats was the same through the top three.

In another sign that geographical proximity bias has receded, U.S. respondents gave more weight to the European sovereign debt crisis than non-U.S. respondents (the majority of whom are European), while non-U.S. respondents gave more weight to the fiscal cliff than U.S. respondents. In previous weeks, there had been strong evidence of regional myopia.

Another item of note, with last week’s dramatic change in Fed policy away from a timetable to targeted unemployment and inflation rates, one might expect the balance of fear to tilt more in the direction of inflation or deflation this week. Instead, there was a notable jump in concerns over both inflation and deflation, particularly from U.S. respondents.

It is reasonable to ask what might happen if there is a deal in the fiscal cliff in the next week or two. Will a deal also have a significant impact on concerns related to government and politicians or will concerns related to institutions persist and prove to be something more than an event-specific concern? Finally, if the fiscal cliff fears disappear with a deal, which new fears will bubble up to take its place? This week several respondents submitted write-in votes related to high-frequency trading (HFT) and algorithmic trading. Will this be the next fear to stalk the stock market?

Once again, thanks to all who participated in this weekly poll.

Related posts:

• Fear Poll Respondents Focus on Fiscal Cliff, Dismissive of European Financial Crisis
• Fear of Governments and Politicians Climb Rapidly as Euro Zone Worries Fade
• Fiscal Cliff Concerns Top Fear Poll, But Central Banks and Politicians Seen as Key Systemic Threats
• Fiscal Cliff and European Sovereign Debt Concerns Recede, Earnings Worries Linger
• Calm Down and Exploit Others’ Anxieties (Barron’s)
• Fear Poll: Fiscal Cliff Fears Spike , Concerns About Excessive Central Bank Interventions Rise
• Fiscal Cliff Worries Grow as Election Nears
• U.S Fiscal Cliff Fears Top VIX Fear Poll Again
• U.S. Fiscal Cliff Concerns Top Results in Inaugural VIX and More Fear Poll
• Chart of the Week: Visualizing the Flash Crash
• Some Thoughts on the Seis de Mayo Crash (yes, my moniker did not stick…)
• A Conceptual Framework for Volatility Events
• Forces Acting on the VIX
• Thinking About Volatility (First in a Series)

Disclosure(s): none

Chart of the Week: Visualizing the Flash Crash

This week the allied forces of the SEC and CFTC released their joint report on the ‘flash crash’ with the title of Findings Regarding the Market Events of May 6, 2010.

While many were underwhelmed by the report, it provides traders with a sense of some of what happened during a day in which the Dow Jones Industrial Average fluctuated some 1138 points.

The chart of the week below shows what happened to IWM, the highly liquid ETF for the Russell 2000 index. IWM trades more than 60 million shares per day and is regularly one of the most active issues traded. Up until 2:43 p.m. ET, IWM was acting normally. Then as the price (dashed line, right scale) began to accelerate downward, liquidity (green and blue bands, left scale) suddenly began to dry up. By 2:46 p.m., market depth (the height of the green and blue bands) in IWM had almost completely disappeared. Over the course of the 74 minutes left in the normal trading session, liquidity began to return slowly to the markets. At the time the markets closed, approximately 60% of the normal market depth from earlier in the day had returned to IWM.

The report linked above has some interesting graphics surrounding trading in ACN, PG, MMM, IBM, AAPL, GE and IWM beginning on page 91 of the PDF. If anything, the action in IWM is the least extreme of the group.

If you have some time, the report is worth at least a scan.

Related posts:

• Some Thoughts on the Seis de Mayo Crash (my moniker did not stick…)
• Volatility and Wide-Range Days with Neutral Closes
• Thinking About Volatility (First in a Series)
• Forces Acting on the VIX
• A Conceptual Framework for Volatility Events
• Availability Bias and Disaster Imprinting
• What My Dog Can Tell Us About Volatility

[source: SEC and CFTC]

Disclosure(s): none

Some Thoughts on the Seis de Mayo Mini-Crash

There are a lot of excellent charts and commentary out there, but before I called it a night, I thought I would share a couple of thoughts about today’s action and the market’s prospects for tomorrow and beyond.
So…in no particular order:

• The possibility of a fat finger order entry error cannot be dismissed, but even if there were one or more unintentional large trades, this does not nullify the concerns about sovereign debt contagion, breaking of technical support, recent excessive bullish sentiment, etc.
• The bottom line is that stocks still have serious problems of a fundamental and technical nature.
• Today’s correction would not have been so steep if stocks had not rallied so sharply, with only brief interruptions, for the past 14 months.
• The VIX spiked over 40 today. While there is no magic number that signals a VIX top, the volatility index is up more than 110% in the last 18 trading days. Apart from September-October 2008, this has never happened in the 17 years since the VIX was launched.
• Whether tomorrow morning opens up or down, I would not give much credence to any big moves at the open tomorrow. If I trade at all in the first half hour, I expect I will be fading any big moves.
• Looking next week and beyond, I would not be surprised to see stocks enter into a trading range, with the late April highs as a top and today’s lows as a bottom.
• Traders should keep in mind that watching and waiting for more market clarity is an appropriate strategy at times. Patience and discipline almost always trump trying to make something happen.
• In times of increased uncertainty, I try to focus on preserving capital, evaluating the fundamental causes and likely duration of high uncertainty, targeting only high reward-risk opportunities, scaling in to new positions, and adhering to stringent stop loss and position management guidelines.
• Finally, a personal motto is, “In volatility, there is opportunity!”

For more on related subjects, readers are encouraged to check out:

• VIX Spikes While Market Sells Off: Quick Thoughts
• Some Thoughts on Current Volatility
• New Game, New Rules
  
• VIX Options as Catastrophe Insurance
• VIX Top Ten Highest End of Day Closes
• Should You Go Long at Volatility Extremes? A Look at the Nikkei 225
  

Disclosure(s): short VIX at time of writing