Market Summary and Analysis is provided by Larry McMillan.
Mr. McMillan is the President of McMillan Analysis Corporation.
VIX® Finally Spikes Up and Back Down
The long-awaited spike move upward by VIX finally occurred this week. It was hardly the classic type seen at least three other times in the last year, but it was good enough it seems. VIX rose above 30 intraday on Tuesday July 15th and then fell back sharply after that. That is typical action at a market bottom, and indeed the S&P500® Index (SPXSM) has rallied strongly since then.
Does this denote the bottom for the market? It is too early to say, but at this point, VIX has not dropped enough to classify its action as that of an intermediate-term trading bottom. For that designation to be applied, VIX would have to break its uptrend, which would mean it would have to close below 23 or so.
See Figure 1 for a chart of VIX, noting the temerity of the current spike as compared to the previous ones. The current VIX peak is most like the one in November, which led to an S&P 500 Index rally of 120 points, but was just a bear market rally as lower prices soon followed. Also, note the rising trend line drawn on the chart. If this trend line is not broken, then lower prices are to be expected for the S&P 500 Index. If it is broken then it's possible that strong rally of the type seen in February or April will be setting up in the near future.
Figure 1 Source: McMillan Analysis Corp.
Right near the bottom of the S&P 500 Index decline, VIX futures traded at a substantial discount, a well-known bullish signal. Specifically, Table 1 shows the (daily closing) discount of the August (front month) futures as the S&P 500 Index neared and then made its trading low this week.
The large discounts on three trading days, July 11th through July 15th, are shown in the table, and then the large market rally started the next day. The discount has now shrunk considerably, once the market rallied, to levels that are negligible as far as predictive value.
Once again this shows that it pays to monitor the premium or discount of the front-month VIX futures as they are useful in helping predict the S&P 500 Index market direction. In previous issues, we have noted that VIX futures traded at a premium to VIX for quite some time in April and May, an action which was the harbinger of the large market decline that's taken place since mid-May.
The Term Structure of Futures Prices
The relationship between futures prices is called the term structure. In general, if near-term contracts are more expensive than longer-term contracts and that relationship is widening, that is bearish. If the differential is shrinking, that's bullish. The typical bearish relationship developed as the market collapsed in recent weeks, and it has moderated somewhat with this rally. What is interesting is that the term structure still has a somewhat bearish shape, even after this market rally. The curve of the term structure is not as steep as it was, but it is still rather steep.
The current shape of the term structure is shown in Table 2. Note that VIX is highest, followed by August, then September, then October, and November. This is an upward sloping term structure. If it continues to flatten (i.e., the various futures converge in price), then that would be bullish. So far, that has happened only modestly.
Strategies
At the current time, the popular strategies do not hold much of an edge. Since the front-month futures are not trading with a significant premium or discount, there is no apparent edge in establishing calendar spreads between the various futures. Of course, if one has an opinion on the movement of the market, it will likely be reflected in VIX, and that could be the beginning of a profitable trade.
For example, suppose you are bullish for further gains from this point. It is likely that the futures contracts would converge in price. Thus a calendar spread in which one sells the highest-priced August futures and buys a lower-priced longer-term futures contract would be a way to potentially capitalize on that.
On the other hand, if you think that this rally is a false one and expect the S&P 500 Index to decline once again, a reverse calendar spread might be a way to play that as one expects the August futures to increase in price faster than the longer-term contracts would. However, the term structure of the futures is already leaning in that direction, so the potential for such a reverse spread might not be all that great.
Contact Information
VIX Futures Last Trade Dates
Contract Last Trade Date
August 2008 08/19/08
September 2008 09/16/08
October 2008 10/20/08
November 2008 11/18/08
December 2008 12/16/08
January 2009 01/20/09
February 2009 02/17/09
March 2009 03/17/09
April 2009 04/14/09
May 2009 05/19/09
选择“Disable on www.wenxuecity.com”
选择“don't run on pages on this domain”
