For the entire month of January I said I thought we would see higher levels of volatility in 2018. As we know typically higher levels of volatility have usually been associated with lower stock markets. In January that did not happen. In January the stock markets went up and so did volatility.
Did I think the VIX (VIX.X) would skyrocket to 37 within a month? No way. Yet here we are with the VIX up 20 in a day and closing at 37. Yes, this is jumpy.
For the better part of the last 2 years one of the easiest 'no brainer' trade has been to short volatility. One of the ETFs used to do this is XIV. So if you think the VIX is going down you buy XIV. Take a look and see how despite the stock market's rise in January, XIV refused to make higher highs. A week or so ago it began plunging, along with the stock market.
I am not an expert on volatility, the VIX or ETFs. I have explained to you I literally just studied the chart of the VIX and noticed that it never stayed under 10 for very long and the rise did not end until the VIX got jumpy. It now seems that after hours on Monday something went awry with XIV and while it closed at $99, it was trading around $20 after hours. That is not a typo.
Since XIV is not the only short VIX product out there, I would assume there is going to be quite a bit of dislocation in the markets on Tuesday. I would suggest doing your own homework on this because as I have stated, I am the farthest thing from an expert.
Away from that, we did see 90% of the volume on the downside yet again, which means we have two consecutive days of this. The last time we saw this was late August 2015. You can see it led to a rebound. But also notice that rebound came back down. Please picture this chart in your head when you wonder what two Vs look like to form a W.
Even the TRIN soared up to 3.5 which is a sign we're getting some long awaited capitulation in the market. We did not see the put/call ratio fly though; it remains quite muted. It is possible that folks are opting to sell rather than protect their portfolios but I can't rationalize the indicator; it is not high when it chimes in at 92% and can't even get itself up over 100%.
The other issue is that the number of stocks making new lows soared again, with about 450 new lows. And this time it's not all bond related issues because, bonds rallied. Finally. That sentiment got too extreme in my view and we saw the 5-year note (and other durations but I've focused on the 5-year here) drop back toward 2.52%. I don't have a firm target on the downside yet but you can see the uptrend line is quite far away, down near 2.35% at present.
I want to finish by noting how oversold we are. The 'what-if' for the McClellan Summation Index is now at +6100 advancers minus decliners. If we use volume for Nasdaq it now requires a net differential of +4.5 billion shares which as you can see is extreme.
My own Oscillator has practically fallen off the chart, especially Nasdaq's. You can see that beginning Wednesday we start to drop a decent string of negative numbers (which is what makes us oversold).
This will not change my view that to get a good low we'd need a W formation.