Chart of the Week: VIX
It’s time for our chart of the week. And we’re going to focus in on a little different type of chart today. We’re gonna look at the VIX, the volatility index. It seems appropriate now as the election is coming up in about 30 days, and we want to see what the VIX is telling us about that event and how the market is looking to respond to that event leading up to it and then after.
Let’s take a look at the VIX here. I put up a line graph over here.
We can see that since the low in July, the VIX has made a series of higher lows. That’s part of a bullish uptrend. And then making some higher highs in the interim (if we exclude out this big pop in August), it’s making some higher highs.
The VIX is in backwardation
And of course, we stopped on Monday, October 7 at around $22-23. If it gets through this line over here – through this channel – it could be a difficult ride for stocks. We notice this only because the VIX term structure, which I’m going to show you right here, is currently in what we call backwardation. It’s not in contango any longer. It was in contango when the VIX, which is this dotted line over here, was below all these numbers, which is the futures – the VIX futures term structure. When this is out of whack over here, it tends to bring up the short end of the curve, the short side of the curve.
Remember this is done on a timeline, so we start with October and it goes all the way up to May 2025. And you can see there’s a value for each of these VIX futures.
What tends to happen is, when the VIX cache comes up over here, it tends to bring up the shortest end of the curve. And it moves the curve into what we call backwardation. This is a term that commodities traders are familiar with, along with contango. The opposite happens when the VIX is down. It tends to pull down the short end, the short side, of the curve.
So, we’re in backwardation right now. And why is this happening? Maybe a year or so ago, a lot of people who bought volatility expiring in the next several weeks, because they thought that the election was going to bring a lot of uncertainty, chaos, and confusion and the markets would be in turmoil during that time. So that’s about a year or so ago.
We’re not seeing the uncertainty go away because of the election, but we are seeing some unwinding of these volatility purchases. And it’s causing havoc in the markets.
Depending on the election, the VIX could rally
Now, if there is no chaos, if there is no confusion following the election in about a month on November 5, we’re going to the air come out of all this volatility over here into the end of the year. And there’s going to be some really huge powerful rally happen once they let the air out of the volatility futures.
We’re getting ahead of ourselves here, but certainly the potential is there. You really do want to get long – at least until January and February – of the markets.
If you can’t stand the short-term volatility that this VIX term structure is telling you is going to be happening over the next three and half to four weeks, just buy some VIX puts, or buy some VIX calls, or buy some market puts. And protect yourself a little bit. That way, instead of having these big wild gyrations in your profile, it’s just going to be a minor move up and down.
So that’s the VIX.
Let me go back to the chart over here for you and show you some of the potential over here. Where could we get up to on the VIX? We could probably get up to this $28 level on the VIX.
But if we come back down, I say we’ll come back down and test this high teens level, about $17 or so on the VIX cache.
So that’s the volatility index for you.
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