Here's a question I got about the Volatility Index that I want to answer as it's probably on people's minds: Is there a chance the VIX will explode again in late August or early September, the way it exploded in early August?
Let's consider a few things. First, the pattern is different now from then. Second, the statistics are different.
You might recall that in late July I harped on a call for an increase in volatility in part because the VIX was hovering around 12 to 14 in July, and the consensus was that we were in for calm markets. But mostly it was because for four-straight days we had such low put/call ratios for the VIX, something that had not happened since 2007. I believed such persistence was likely to be rewarded with a higher VIX.
Right now that is not the case. The VIX is not hovering at 12, but rather it hasn't traded under 16 in weeks. In addition, the put/call ratio for the VIX hasn't been extreme on either end of the spectrum for longer than a day, so we can't hang our hat on a statistic that says there's an extreme out there.
Then, there is the chart itself. Even if you want to compare it to the fourth quarter of last year, when the VIX saw those twin peaks in October, we still had the entire month of November to get through. Sure, November saw the VIX move between 16 and 22, but it did not explode higher again until December. It needed time to build a base of sorts.
There is one fly in the "lower volatility" ointment, though.
In a Wall Street Journal article published Tuesday, a chart showed that folks are short on VIX futures, back to the levels they were at last fall, before the decline. In other words, there seems to be a consensus that we will not see more volatility, but less, which as a contrarian you'd want to bet against.
Another chart showed the ratio of bearish to bullish positions for the VIX futures by leveraged funds, which looks like it could be back to May levels.
It would note, however, that these are not indicators I use and the data is through last Tuesday, a week ago. The market made a low on Thursday, so it's entirely possible the data is now old.
Either way, I do not think the VIX is going back to the 12 area, but at this point I cannot make the case for an explosion higher. Not yet, at least. I think it is more likely it is in a higher trading range than it has been for most of the year.