A Funny Thing

Seems VIX futures had it right all along

Got home later than expected yesterday, so didn’t get this post organized until this morning. Also thought it made sense to see if last night’s bullish open on the futures would hold overnight. It did. Seems there may actually be a peace deal in the Middle East, though plenty of time for a rug pull between now and Friday’s scheduled signing. As shown below, the green in equity markets showed up across all the indices we include on our weekly recap. And ex-US markets led the charge as they may have the most to gain from the end of tensions and the reopening of the Straits. All that green was complemented by a sea of red down in the volatility numbers. The bulls are back, baby!

That increase in risk appetite showed up in a nice improvement for the VIX Mix that shot up 14 points on Friday alone and finished the week up 11. That’s still in the lower part of the neutral zone, but remember that we hit a low of 16% last Wednesday, so that’s a 25 point improvement from the low. Looking at the components, Wednesday’s low saw all 17 components in the red. By Friday, that mix was one bullish and seven bearish - that puts nine of them in yellow to match the composite.

Even with that improvement, our chrono chart still looks very weak and the S&P 500 will need to keep working to regain its recent all-time highs.

Recall that last week we kept staring at the chart of spot VIX and the VIX futures wondering how the futures were able to keep some contango in spite of the bearishness in equity markets and the elevated level of spot. This first chart comes from last Wednesday’s close that was the worst of the week. We pointed out that spot VIX north of the futures was the funny thing that had to change one way or the other.

Roll forward to Friday’s finish and the change came from spot VIX finishing more than three points lower than the Friday prior. We also see an increase in the spread across the futures, back to almost five points. This is the picture of a tailwind for short volatility (for example, long SPX or long SVIX).

Before we go, just a reminder that the June VIX futures contract will expire on Wednesday morning and it will follow spot VIX like a baby chick between now and then. If spot continues to hang out 18 or lower, there will be a lot of juice in the short vol trade. But one slip of the peace deal could erase all of that goodness, so be just a little careful out there.

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