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Is the VIX About to Surge Higher?

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On any weakness, we see a huge amount of fear come into the market, and sure enough, just as quickly we see big call buying and the VIX drops right back lower.

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While in New York last week, I dropped by the Yahoo Finance offices and shot some videos with the always entertaining Jeff Macke for Breakout. In this video with Jeff, we discuss the VIX (INDEXCBOE:VIX) and why I think it will continue to stay low. For my overall market views, here's a link to my CNBC spot live from the NYSE.

What About the VIX?

We continue to see call adds on the VIX. Currently there are more than 6 million open calls on the VIX and this very well could be another new record once VIX options expire in a few weeks. If history has taught us anything it is when the masses think one way, you might want to go the other way. Last month we had a brief two day sell-off, yet we saw a record spike on the VIX for the size pullback on the SPX. In other words, on any weakness we see a huge amount of fear come into the market and sure enough, just as quickly we see big call buying and the VIX drops right back lower.



What Would Be a Buy Signal?

The thing to remember is if you look back at the '90s, the VIX spent nearly six years beneath the 20 level. Then last decade about four years. So far we've been beneath 25 for about a year. We think we could be looking at a multi-year "low" VIX, as this is perfectly normal. Especially when you consider just how many people are looking for a higher VIX based on the volatility based ETNs like the VXX (NYSEARCA:VXX). We saw huge inflows on the VXX last quarter, yet, it is down something like 97% since inceptions. So any moves up to say 20 on the VIX could be a good time to buy stocks, as that area will probably be the cap on the move.



How Low Can It Go? Single Digits?

Well, we've seen single digits on the SPX historical volatility recently. But the VIX historically has bottomed around 10, so I'd say that is a low as it'll go. Single digits could be a little too low.

This article by Ryan Detrick, CMT, was originally published on Schaeffer's Investment Research.

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Twitter: @schaeffers
No positions in stocks mentioned.
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