The Votes Are In!

Why so bearish?

As regular readers know, I have been documenting the healthy looking contango and risk premium present in the VIX futures term structure. I have also pointed out that this normally represents a tailwind for “risk-on” positioning that would include being short volatility. So I decided to launch a poll on X/Twitter yesterday to ask the audience if they would be comfortable shorting vol at the present time. Recognizing that 197 votes is a pretty lousy response, there was a resounding “NO” that showed in the results. We live in interesting times.

As if to poke fun at the naysayers, the VIX Mix finished yesterday back in the green on our gauge at 69%. Ten of 17 indicators are also now bullish with only one still hanging in on the bearish end of the spectrum.

I would still contend that the Mix is lagging the recent performance of the S&P 500, but we have seen a lot of improvement after the July 29th punch in the face that led to a bearish 19% reading.

Going back to the volatility term structure, the chart below shows ~5 points of contango from August out to March and the risk premium between August and spot VIX sits at the 86th percentile of historical values for M1 over spot.

Using VX30 (30-day constant maturity VIX futures) to measure the risk premium over spot VIX, we can see the recent “rally” that brought the premium up to the 90th percentile.

Any way you look at the current state of the volatility complex, it is more bullish that bearish. But there is clearly some sentiment that the situation is more fragile than the data support. The most recent employment reports just landed and the initial reaction in the equity futures is positive. We’ve pointed out the possibility that markets needed to “rest and digest” after the flush higher over the past week. It can be healthy to have a few bears in the mix to keep things from getting out of control. At the present time, the volatility complex favors a bullish view in spite of the skeptics who voted in our poll. Maybe they’re just early. We’ll be watching for data that supports their take.

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