Macro Wrap – $VIX and $SPX Both Near 1-Month Highs

by Enis December 20, 2012 7:46 am • Commentary

VIX price action surprised everyone yesterday.  Even when the market was close to unchanged midday, VIX spot was up almost a point.  Some of that can be attributed to the monthly roll, as Dan mentioned yesterday.  But by the close, the VIX closed at one-month highs.  Though the SPX index closed down 0.75%, it is coming off its highest level in 2 months.  That’s a very rare combo – both VIX and SPX near one month highs.  So a 11.5% move higher in the VIX on a modest pullback in the SPX caught everyone’s attention, including mine.

This year’s fiscal cliff debate has thrown a monkey wrench into usual VIX price action.  The normally quiet holiday season now has a huge event smack dab in the middle of it.  However, VIX price action yesterday is also a function of skewed positioning.  Short VIX futures positioning is clearly a crowded bet (one that has worked well in low-volatility 2012).  Here is a chart of non-commercial VIX futures positioning over the last 8 years, courtesy of our friend Brian Kelly:



The takeaway from this chart is that there is a crowded group of speculators, relative to history, betting on lower VIX futures.  Having said that, the speculators have been generally rewarded over the last few months, so crowded positioning is no guarantee that the trade immediately reverses.  But it certainly will exacerbate any up moves in the VIX if and when legitimate fear returns to the broader market.

Markets overnight:

  • Asia was mixed.  Japan broke its streak of higher closes, ending down 1%, after the BOJ maintained its 1% inflation target even though new Prime Minister Abe had called for a new target of 2%
  • Europe opened red, but is now trading up 0.15%.  SPX futures indicate a +0.2% open
  • The dollar is slightly lower, while Treasury bonds are a bit higher.  Copper is down almost 1% while gold and oil up a touch.
  • The ICE is in talks to buy NYX.  Given the regulatory issues of a tie-up of 2 exchanges, the merger arb traders will have a field day with this potential merger
  • NKE and RIMM both report after the close today.