VIX closed the week down 0.39 to 13.98 for a drop of 2.71%. This is not the entire story by a long shot. The S&P 500 was under pressure mid-week and the result was VIX in the mid-16’s for a portion of Wednesday’s trading. When VIX is elevated I automatically check the near month futures. On Wednesday September was officially the front month. Throughout the VIX action on Wednesday October remained at a solid premium of around a point to the September contract. A narrowing of that spread would have been an indication of a little more near term concern. Also, with all the talk of tapering commencing in September I have been keeping a close eye on the September futures relative to the October contract. The chart below shows the daily settlement of the September VIX futures relative to the October VIX futures. As September expiration approaches the expectation would be for this spread to trend up to 1.5 or more into expiration, depending on the environment. Note the trend is in the opposite direction. A continued narrowing might be an early negative sign for the stock market. As a point of context where there were sixteen days remaining until August expiration the August contract was at a 1.35 discount to the September contract.
The VIX curve shifted in a pretty normal manner despite the elevated range of volatility last week. Despite a NDX move to the upside (partially brought to you by Steve Ballmer) that was three times the move in the S&P 500, VXN was barely down on the week. The spread between VXN and VIX had been tight relative to history so this may be the result of a return to normalcy. Typically the spread is around 1.00 to 1.50 depending on the period of historical prices analyzed. On Friday it went out at 0.64, widening from the spread of 0.46 the previous week.