Momma said there’ll be day’s like this, there’ll be days like this…well you get the picture. The VIX pushed up against and just beyond 10 today or roughly 5% higher. This with the major averages largely higher. It wasn’t until the final trading hour that VIX M1 and M2 Futures started to catch some serious bids, but nonetheless they did catch bids, which found the Futures contracts higher as depicted below…a sea of green.
The gravitation back to VIX 10 was largely an expectation for most volatility participants as the low cost for hedging long portfolios becomes too great to ignore. In short, there’s nothing new to see here folks, as the equity markets remain optimistically bullish with the VIX, although elevated from the prior day, still representing complacency in the markets.
Should the coming days find equities under pressure with ramping volatility, this will likely represent a strengthening opportunity for the short-VOL crowd. The rationale for such VOL participation is found in the underpinnings of the economy as well as corporate earnings growth. Fourth quarter earnings growth is expected to come in at greater than 11% on revenue growth of just under 7 percent. These are justifications for the bull market to continue in 2018. As such, any momentary VIX spikes will be “short-lived”. One cautionary flag so to speak to keep a watchful eye on would be the 10-year Treasury yield. As I’ve noted many times, portfolio allocation ratio concerns come into play should the 10-year Treasury yield hover above 2.42% for consecutive weeks followed by a march beyond 2.60 percent. At present, the 10-yeild has not yet held above 2.42% for 2 consecutive weeks although at present the yield is above 2.50 percent. So keep a watchful eye on the yield as it may, at the very least, curtail equity sentiment and impact levels of volatility. It’s one thing to short-VOL, it’s another to do so with all the statistical information and data to guide proportionate participation that yields strong profits.
Although contango curtailed from 11.46% ,coming into the trading day, to 10.30%, contango costs remain elevated for long-term holders of VXX and/or UVXY. Term structure remains on its long-standing trend line.
While equities remain richly valued and many investors desire a pullback, bull markets don’t die of old age any more than they do from desired outcomes. Of course, and more simply stated, the major averages are over due for some percentage pullback and unless the S&P achieves a record breaking 395 trading days without a pullback of 5 percent.
When shorting volatility products, always do so assuming the position will go against you 100% and plan to layer greater positions into further elevated VIX levels, assuming the backdrop of economic data remains correlated to strengthening corporate earnings. Stay liquid, stay vigilant and position for long-term profits in the VOL-complex….Momma said, Momma said!