The VIX is receding, finally

EYE ON VOLATILITY
The VIX is receding, finally

From technical perspective the VIX looks poised to decline. It has already traded at levels today below its 30 day moving average, as well as the 30 and 90 day realized volatility for the S&P 500.

If you read our work regularly, you know that we watch the VIX closely. Since the second week of October, we have viewed the wild gyrations of the “fear index” as the volatility equivalent of a short squeeze, where those very few arbitrageurs left in the options markets with capital have had the heads of the many without it caught in a vise.

The models employed by the designers of the VIX assumed that implied volatility could be extrapolated by backing out the known factors (maturity, difference between the strike and underlying) and a series of assumptions (e.g. cost of funding). The implicit assumption of this methodology is that the option premium reflects the ability of a trader to execute a delta hedge in the underlying market simultaneous to trading the option. Obviously, if a trader cannot execute a hedge due to choppy markets (or say, a short sale ban) or if he has no funding available, he will not be able to manage risk efficiently. If the trader is a market maker, and therefore OBLIGATED to show a price, he will show one with a premium that is either so richly priced he has a high degree of confidence that the premium will offset any loss or it will simply discourage anyone from trading with him (more often the preferred outcome).

As such, it is our opinion that the VIX here is still not really measuring equity investor sentiment, even though it has come down by more than 40 points from its high. Instead the VIX appears to remain more a measure of liquidity in the risk markets, which have been severely disrupted.

The decline of the VIX towards levels which appear more “normal” compared to longer term historical averages is inevitable. As a former colleague of mine recently commented “It would be nearly impossible for realized volatility to persist above 50 forever. At that level everything would hit zero eventually and there would be no more market.”

Andrew Barber
Director

Another French Revolution?

"Don't be complacent," writes Hedgeye Managing Director Neil Howe. "Tectonic shifts are underway in France. Is there the prospect of the new Sixth Republic? C'est vraiment possible."

read more

Cartoon of the Day: The Trend is Your Friend

"All of the key trending macro data suggests the U.S. economy is accelerating," Hedgeye CEO Keith McCullough says.

read more

A Sneak Peek At Hedgeye's 2017 GDP Estimates

Here's an inside look at our GDP estimates versus Wall Street consensus.

read more

Cartoon of the Day: Green Thumb

So far, 64 of 498 companies in the S&P 500 have reported aggregate sales and earnings growth of 6.1% and 16.8% respectively.

read more

Europe's Battles Against Apple, Google, Innovation & Jobs

"“I am very concerned the E.U. maintains a battle against the American giants while doing everything possible to sustain so-called national champions," writes economist Daniel Lacalle. "Attacking innovation doesn’t create jobs.”

read more

An Open Letter to Pandora Management...

"Please stop leaking information to the press," writes Hedgeye Internet & Media analyst Hesham Shaaban. "You are getting in your own way, and blowing up your shareholders in the process."

read more

A 'Toxic Cocktail' Brewing for A Best Idea Short

The first quarter earnings pre-announcement today is not the end of the story for Mednax (MD). Rising labor costs and slowing volume is a toxic cocktail...

read more

Energy Stocks: Time to Buy? Here's What You Need to Know

If you're heavily-invested in Energy stocks it's been a heck of a year. Energy is the worst-performing sector in the S&P 500 year-to-date and value investors are now hunting for bargains in the oil patch. Before you buy, here's what you need to know.

read more

McCullough: ‘My 1-Minute Summary of My Institutional Meetings in NYC Yesterday’

What are even some of the smartest investors in the world missing right now?

read more

Cartoon of the Day: Political Portfolio Positioning

Leave your politics out of your portfolio.

read more

Jim Rickards Answers the Hedgeye 21

Bestselling author Jim Rickards says if he could be any animal he’d be a T-Rex. He also loves bonds and hates equities. Check out all of his answers to the Hedgeye 21.

read more

Amazon's New 'Big Idea': Ignore It At Your Own Peril

"We all see another ‘big idea’ out of Amazon (or the press making one up) just about every day," writes Retail Sector Head Brian McGough. "But whatever you do, DON’T ignore this one!"

read more