In my regular weekly update and analysis of major macro markets – Trading Week – I always include the VIX. What’s the VIX you say?
From Bloomberg:
The Chicago Board Options Exchange Volatility Index reflects a market estimate of future volatility, based on the weighted average of the implied volalities for a wide range of strikes.
In other words, it tracks the volatility of risk markets, based upon the cost of insuring the ups and downs using options. Therefore, it is crucial to watch, and forms part of not only my trading system (both short-term and position systems) but indeed, my investing strategy as well.
So what is going on? Here was the long term picture I gave last weekend:
The longer term chart pattern below is normally quite bearish – for risk assets, not those who trade the VIX. The bullish picture is another “great moderation” – but lows like this don’t last for long…
I then suggested that looking at the daily chart, which showed a breakout before the declines seen in equity markets and divergences in bond markets (“safety” up, periphery down), could still be noise, but something to watch very closely.
Indeed. Here is the picture this morning, where the VIX jumped 9% overnight, with a very clear breakout:
For those wondering what this usually presages, here is a chart covering the GFC, the QE1 and QE1.5 inspired risk-on rally of 2009, before the Euro Crisis Mk1 in May 2010, then the QE2 risk-on rally of 2010-2011:
Time to buy or time to step aside? What’s more important is how have you managed your risk so far and what are your management strategies from here on in. The “when to buy” question is moot with volatility like this.
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