CBOE Volatility Index (VIX)

CBOE S&P 500 Volatility Index (VIX) Setting Up For a Breakout to The Upside

Posted in CBOE Volatility Index (VIX) on October 7th, 2012 by admin – Be the first to comment

By Jim Donnelly, Olson Global Markets

As the presidential election nears, the CBOE S&P 500 Volatility Index (VIX) appears to be setting up for a “breakout” to the upside. Oversold conditions remain on weekly charts and could stay that way (with the VIX holding at low nominal levels) for a few weeks more. That being said, if then next move in the VIX results in a break above key downtrend resistance currently sitting at 18.75, a solid move to the upside could be triggered.

It is important to note that in each of the past three (3) “breakouts” above similar types of resistance (on 9/15/2008, 5/4/2010 and 8/4/2011), the S&P 500 Index declined by 44.1% (from 1192.70 to 666.79); by 13.9% (from 1,173.60 to 1,010.91); and by 11.55% (from 1,260.23 to 1,115.68) respectively. Although each of these VIX “breakouts” resulted in consecutively smaller downside declines in the S&P 500 index, the current potential “breakout” would likely occur at a low nominal level relative to the prior three “breakouts”. In addition, if the VIX were to “take aim” at a test of key resistance (currently sitting at 45), the percentage “jump” in the VIX itself would represent a potential 140% move. That would be less that the 195.3% move that occurred in the wake of the 9/15/2008 S&P 500 decline, but greater than the 98.6% jump that followed the 5/4/2010 move; and the 78.1% jump that followed the 8/4/2011 S&P decline.

What does this suggest? It suggests that potential percentage decline in the S&P 500 index could be less than the plunge that occurred during 2008-2009, but greater than the declines that were seen following the 2010 and 2011 VIX “breakouts”.

What could trigger such an event? The usual suspects: The presidential election; the fiscal cliff; increasing turmoil in the middle-east; the deleveraging of the European zone; tensions between China and Japan, let alone the expected regime change in China and the on-going debate over the possibility of “hard landing” in the Chinese economy. These, of course, are the “known unknowns”! There’s always the possibility for an “unknown unknown” to occur as well.


CBOE Volatility Index (VIX) Approaching Long-Term Support

Posted in CBOE Volatility Index (VIX) on August 8th, 2012 by admin – Be the first to comment

By Jim Donnelly, Olson Global Markets

With July’s employment data posting largely mixed, but better-than-expected results, the S&P 500 Index scored a nearly 26pt gain on Friday to end the week at 1,390.99. That was its highest reading since May 4 having jumped nearly 125pts since the beginning of June. Moreover, the CBOE Volatility Index (VIX) of the S&P 500 fell further last week and is now apparently taking aim at a retest of long-term trend line support currently sitting at the 13.50 level.

Although day-to-day price swings continues to dominate, the general trend of the S&P 500 Index remains positive. That being said, prolonged uncertainty over the European debt crisis, the outcome of this year’s presidential election and the inability of Congress to address the “fiscal cliff” issue until (realistically) after the November elections have passed has hastened a shift away from “risk” assets in preference of cash, cash equivalents or intermediate-term fixed income instruments by a number of investors. That same uncertainty has resulted in a shift toward dividend paying stocks within equity portfolios. As a consequence, retirees, pension funds and yield seekers who are in need of an income stream have been forced to accept lower rates of return on bonds and lower dividend yields on stocks. In turn, that has resulted in higher prices being paid for those assets. A byproduct of this shift has been the continuation of impressive gains registered in bond prices and dividend paying stocks at the expense of a number of growth stocks that have recently suffered unexpected setbacks. In addition, the desire to preserve capital by another set of investors has produced the phenomenon of “negative interest rates” currently being offered on a number of European sovereign debt issues.

Interestingly, this unusual investment setup has created an environment in which a bit of good news can trigger a sizeable daily gain in equity prices, followed by a return to a string of modest day-to-day retreats highlighted by a series of glum macro economic forecasts. Since the VIX is often referred to as the “fear index”, and given the inverse relationship it has with the direction of the S&P 500 index, higher equity prices accompanied by a decline in the VIX could play out for the remainder of the summer. But as the November elections approach, or if the European finance ministers find that an intensified crisis of confidence begins to grow before then, a move toward the 13.50 area on the VIX might prove to be a very attractive “buy”.