This Week in VIX and VXN – 8/16/2013

Equity markets were lower in the US last week and volatility rose as expected.  The S&P 500 was off over 2% and NASDAQ-100 dropped 1.4%.  VIX climbed 7% and VXN was up 8% as the spread between the two widened a bit, but is still below average.  The August VXN contract settled at 15.00 on Friday at a 0.55 premium to the VIX contract.  Both cease trading on Tuesday and settle on the open Wednesday morning.  One thing of note, despite the S&P being down on Friday, VIX was lower as well.  Usually that sort of thing gets a little attention followed by an explanation.  VIX has an extra headwind on Friday due to the calculation being based on calendar days.  On Fridays I also look at the front month future as a market indication and the August future was up 0.20 on Friday which is a little bit more in line with what would be expected when the S&P 500 is down.

Both VIX and VXN curves moved higher in a normal fashion with farther dated contracts moving up, but at a small magnitude.   Last week I noted that the September VIX future was an outlier due to expected tapering by the Fed.  The same sort of price action was not apparent this past week.  Beginning this week I plan to focus on the spread between the September contract and VIX index to see if worry about the equity markets is creeping into the VIX futures.  It could be an early signal of more downside in the S&P 500.

Finally, I was recently asked what ‘tapering’ meant relative to the financial markets.  The word is being thrown around like everyone knows exactly what it means.   Basically it would be a reduction of Fed bond buying activity – less cheap money – less money to be invested in stocks.  After answering that question I wondered to myself if Bernanke breaks out his old college thesaurus before introducing a new word into the business vernacular.  I used an online version which also included antonyms and found it pretty interesting that an antonym for taper is balloon.  Let’s hope the tapering doesn’t have the impact of popping a balloon.