Chart of the Day – Curious Case of December $VIX

by Enis December 17, 2013 7:02 am • Commentary

December is the holiday season.  It’s the season of giving, of sleigh bells, of gifts under the tree, of year-end recaps, and of course, the season of the Santa Claus Rally.

The rationale behind the Santa Claus rally is based in history.  I’ve seen the December seasonality data mentioned more frequently this year than during any previous December of my trading career, which is a cause for concern.  But a better indication of potential December jitters than my own hazy personal memory is the behavior of the VIX so far this month.

The VIX has rallied on 13 of the past 15 trading days, quite an aberration for an index that generally falls in increments and rises in chunks.  Moreover, the S&P 500 is only down about 1% in that period.  The actual rise in the VIX since November 22nd is not that large given the starting level near 12 (the VIX rose from 12 to 17 on April 15th alone).  Yet, the persistent rise speaks to the increasing demand for protection among institutional traders, despite the broad chatter about a year-end rally.

Of course, the recent rise might be much ado about nothing if the VIX falls back after this week’s FOMC meeting.  The range over the past 18 months has remained quite firmly bounded by 12 and 22:

VIX spot daily, Courtesy of Bloomberg
VIX spot daily, Courtesy of Bloomberg

If the meeting this week is a non-event, then a move back down to near 12 ahead of Christmas and New Year’s is to be expected.  If we do get some fireworks this week though, I wouldn’t be surprised to see a move to the upper end of the VIX range around 20-22.  One big reason for that is the nature of sentiment, which I prefer to measure using indicators that take into account actual market positioning rather than simple surveys with no money on the line.

Here is the CBOE composite equity put/call ratio over the past 3 years:

CBOE Put/Call Ratio Composite, Courtesy of Bloomberg
CBOE Put/Call Ratio Composite, Courtesy of Bloomberg

The last time the ratio registered a reading of 1 or higher was on October 15th.  This is the first full 2 month period (circled in green) in the past 3 years that has not seen a reading of 1 or higher.

That’s the backdrop.  The U.S. equity markets have shown their resilience on numerous occasions in 2013.  But the price action in the VIX, in December no less, still indicates some lingering worries.