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VIX Sonar Points to Bottom in Volatility


It's wrong to use the sentiment indicator as a window into smart money.

When last we checked in with the VIX sonar, futures premiums were high and OTM call buyers were rampant.


VIX options volume is drying up. And as we noted yesterday, futures premiums are drifting, though still at premiums.

When the VIX futures were high and the world wanted to own calls, a large segment of the punditry came to the erroneous conclusion that this was all smart money and the VIX would soon soar. They also took this to mean the market would tank. Neither happened, of course.

The analysis was very wrong, in my humble opinion, in that they were taking a sentiment indicator designed as a contra signal (high VIX = high fear = bullish) and assuming it instead was now a window into smart money. Why? Because anyone who bought the VIX on a vaguely similar setup in 2008 was, in fact, very smart money ahead of the Lehman fall.

To me, this is now a more bullish setup for the VIX and bearish for the market. It's disinterest, it's complacency. Or at least it's headed in that direction. Of course, ideally, we'd see the VIX taking at the recent lows and VIX futures premiums evaporating. All we have now, really, is just lack of interest in VIX calls.

Again though, true complacency isn't here yet, and even it was, it's not a great market timer. But if you're looking to all things VIX for guidance, it's starting to head down a path more suggestive of a bottom (in volatility).
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