It Looks Different This Time

Vol complex says don't fear the Bank of Japan

Apologies for being a little late this morning after an early breakfast meeting. Another three-day weekend on tap and investment nerds are focused on the Bank of Japan as the possible source of fireworks. There’s reason to be concerned. The last time we saw USDJPY above 162 was in July of 2024 and unwinding of the Yen carry trade took a lot of blame for the SPX decline and volatility spike that followed.

At the same time, our composite volatility gauge sits in the middle of our dial suggesting that investors are not on high alert. For reference, the Mix was at 57% (Neutral) on July 15, 2024 before turning bearish on July 18th at 25% and then staying there right through the August 5th pinnacle for VIX. More on the comparison of then and now down below.

Yesterday’s steady reading allowed the trend line to move higher for a second day in a row. Steady as she goes.

Maybe the BOJ will blow things up tomorrow and turn next week into a train wreck. But let’s do a little comparison of what we saw back in 2024 before all hell broke loose and what we see at the present time. First up is a chart of the ProShares VIX Short-Term Futures ETF that give you long vol exposure. It has been in a downtrend since the end of March.

In contrast, this is what it looked like in the Summer of 2024. The VIX Mix turned bearish on 7/18 and the 8/21 EMA crossover turned green on the 19th, both supporting a long position in VIXY. And the EMAs stayed green even as price took a couple of small dips.

Now let’s look at our favorite take on the VIX futures term structure - the ratio of VIXM:VIXY. There have been two little dips on the short-term EMA crossover but the 8-21 had been green since early April. This points to short vol positioning (e.g. long SVIX) for now.

Once again back to those fateful days of July 2024 and we see a very different picture. The shorter EMA crossover dipped into the red at the same time the VIX Mix turned bearish. That was reinforced by a bearish 8-21 crossover on 7/24 and both remained in the red through the SPY “crash” on August 5th. Once again, the signs were there to support bearish positioning before the worst of damage.

Let’s be clear. Bad stuff could happen if the BOJ aggressively intervenes in currency markets to support the Yen. But the volatility complex is not taking the bait. It is instead recommending a complete day off tomorrow free of concerns that the crap will hit the fan while you crank up the smoker to get that pork shoulder and ribs ready for Saturday. Happy 250th to the United States!

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