Market Recap – October 8, 2013
Volatility posts of interest from today:
- A History of the VIX During Recent Debt Ceiling and Sequestration Battles (VIX And More)
- $VIX drifting like BattleCat over @SnoopDogg studio $3 move on Sonar Report (Dr. J’s Blog)
- Rational Behavior from the CBOE Volatility Index (VIX) (Schaeffer’s Trading Floor Blog)
As I tweeted a few weeks ago, I closed my short position on volatility completely by Sept. 26. I remain in cash now, but I am looking for an opportunity to short volatility again.
My current market hypothesis is that we are due for a bounce, but we may see more selling before the bulls regain control. Important factors I’m watching include:
- VIX – we’ve seen a spike above 20…but remember, the long-term average is 20. I’d prefer to see a value in the high 20s or more before I “back up the bus” (by shorting volatility).
- VVIX – hit 110 today; this is a good sign; tradable bottoms are often found when VVIX hits 110 or higher.
- VIX term structure – near-term part of the curve is in backwardation, but long-term portion is still in contango
- First, this tells me the current market fear is a short-term concern…and that when that fear starts to subside, near-term volatility is likely to drop fast.
- Second, this means I do NOT want to be short VXX, short UVXY, or long XIV near-term backwardation exists. The tide is working again the “short volatility” trade right now.
- Volume – we have started seeing a spike in volume in the major ETFs (SPY, IWM, QQQ), as well as the volatility ETFs (VXX, XIV, and UVXY). I would prefer to see spikes in daily trading volume of 3x the average. We are close, but not there yet.
- Momentum – to be comfortable with a longer-term “short volatility” position, I want to see bullish market momentum. The last few weeks have seen bearish trading.
- New Highs/New Lows (in the S&P500) – highs have contracted, but we have yet to see a spike in new lows (representing excessive bearishness).
- Spike in my blog traffic and # of twitter followers – despite taking a blogging hiatus the last few weeks, I have seen a spike the last two days. Investors seek greater information during periods of uncertainty.
Today’s charts are below, courtesy of StockCharts.com and Trading Volatility.