The Week in VIX – 1/20 – 1/23

The S&P 500 was strong and VIX was weak last week. We returned to contango in VIX world as the S&P 500 was up 1.6% for the week. This despite having a tough Friday. Note the February future is at a pretty nice premium to the spot index. This may be a function of the people of Greece going to the polls this weekend, a two day Fed meeting, and a slew of economic numbers coming out next week.

VIX Curve

Near the top of my weekend ‘must read’ list is Steven Sears’ Striking Price column in Barron’s. This weekend’s column discusses a topic that is always on my mind and what I write of at this very moment – VIX. Buzz Gregory at Goldman Sachs is calling for an average of 16.00 for VIX in 2015. For some perspective so far this year VIX is averaging 16.66 and going all the way back to 1990 the long term average daily close for VIX is 19.94 (or 20.00 for the VIX tourists that only speak of VIX when the market is under pressure).

VIX averaging around 16 does not bode well for stocks in 2015 or 2016 for that matter. The chart below is one of my favorites showing the rolling 1-year, 5-year, and 10-year average close for VIX from 2000 through 2014.

Long Term VIX Averages

Note VIX dipped for a couple of years (2005 and 2006 where it averaged 12.81) before 2007 where it averaged 17.54. The past two years appear to be somewhat of a repeat of those two years with VIX averaging in the low 14’s. If Buzz is correct, and he’s a sharp guy so there’s no reason to doubt him, then this may be the beginning of a couple of years of elevated VIX levels. Why should even the VIX tourists care? For VIX to average higher levels we will also need to see the S&P 500 under pressure.