I did some Yahoo Breakout Videos with Matt Nesto recently; in one of them, we discussed the VIX
(INDEXCBOE:VIX). You can watch the whole video here
, but here’s a summary of what we discussed.
The one constant we’ve seen for a long time now is the masses feeling the need to be hedged against higher volatility. I was on with Matt a year ago
and said that the VIX would stay low; now 12 months later, we’ve seen the VIX stay beneath that 20-25 area.
Looking at things today, not much has changed. Just last month, we saw some of the most aggressive VIX call buying we’ve seen since late 2009. Also, open interest in the August series saw a huge spike in open VIX calls -- the third highest ever. From a psychological point of view, when so many people are expecting higher volatility, it probably won’t happen.
The iPath S&P 500 VIX Short Term Futures ETN
(NYSEARCA:VXX) is another example of this. It is down 99% since inception, yet shares outstanding have tripled this year so far.
Sure, we’ll have moves higher, but I don’t think we’ll see a move above 25. Looking at history, the VIX spent nearly six years beneath the 20 to 25 area in the 1990s. Then last decade, it spent nearly four years beneath that area. Now in the years between, we saw periods of a high VIX and much higher volatility. Currently, we’re about 20 months into trading beneath that 20 to 25 area. In other words, based on history, we could have years left of lower volatility-- especially when you consider how many continue to look for higher volatility.
This article by Ryan Detrick, CMT, was originally published on Schaeffer's Investment Research.
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