When we have volatile weeks like last week I will alter the various term structure of volatility charts included in these blogs. The first graphic is an example of this where I added Tuesday’s closing levels for VXST, VIX, VXV, and VXMT to the typical week over week curve. Something that really stands out to me on this graphic is the shape of the Tuesday close. There is no inversion with VXST moving to a premium relative to VIX and the levels at the far end of the curve (VXV and VXMT) are at a slight premium to near term volatility. Stated more plainly despite elevated volatility the shape remains normal which can also be interpreted as displaying minimal panic.
The lack of panic showing up in the term structure curve can be interpreted two ways. First, the market is somewhat mentally prepared for extra volatility. The other idea behind this activity is that the market was expecting a rebound which it got the next two days before dropping again to finish the week down.
I came across an article this past week discussing the high level of the VIX of VIX (VVIX) as of late. This positing actually referred to VVIX being at ‘panic levels’. Using a long term history of VVIX that’s not really true. The chart below shows VVIX for all of 2014 and the first few days of 2015. The average over this full time period has been about 84 with the average since October 1st coming in at 99.
When I first started looking at VVIX over four years ago the historical range was 80 to 120 with an average of about 100. For the past three years this range was pretty low with VVIX visiting the 60’s. I think we are back to a ‘normal’ level for VVIX based on long term history and not necessarily panic levels.
It’s early in 2015, but so far so good for VXX and the long oriented VIX related ETPs. The opposite may be said for the short funds which have been feeling the impact of the various moves up in VIX. Note the short funds gave up over 4% with VXX and the other long funds gaining closer to 3% last week. The market continues to demonstrate how inverse funds will not match the opposite performance of their long counterparts since the inverse funds match a daily performance while the long funds match the direct performance of the strategies they are created to follow.