Something strange
Posted by Charles II on March 13, 2012
There is pretty good economic news at the moment, so it’s not really a surprise to see that the VIX, which is supposedly a measure of volatility is falling–and the trading volume of a proxy for VIX, called VIXY, has risen substantially. A chart below shows the situation, with VIX shown as a blue line and the S&P as a red line.
Note that VIX spikes when the market is falling sharply. In the last 22 years, it hasn’t been at 16 or below except 1992-6 and 2003-7. For two-thirds of the time, it has been above, and has even surpassed 55 (during the crash of 2008, natch). The size of the spike is not directly related to the size of the drop. It hit 44 over a 14% drop in 1998, and went to almost 60 in the crash of 2008, when the market dropped by over 50%.
Is the economic situation all that well settled? Is this a bubble of tranquility where there should be fear?
I am making small bets that this is a bubble. VIXY hit a minimum of 43 in the last two years. It’s plunging right now, down from 55 on March 6th to 45 right now, and falling even though VIX itself is rising. It has been as high as 125 in the two years of its existence, which doesn’t include the great crash.
I’m in at 49.
We’ll see how that goes. Maybe ice cream sodas for the whole family.
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Added: I actually hate VIXY, because you have to watch it constantly. It spiked to 125 only over the space of a few hours. It was, however, over 100 for about three trading weeks, so if you were in at 50, it was not hard to double one’s money. I did not achieve anywhere near such stellar results, but made lunch money. An easier fund to trade is VIXM, which moves more slowly, and therefore doesn’t have as much upside potential. This is, if it needs to be said, definitely not investment advice. For all I know, the market is about to melt upward, sending VIX down by 30%, and VIXY perhaps by more.
4 Responses to “Something strange”
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Mercury Rising 鳯女 
MarkH said
Conservatives have been saying for some time uncertainty was abound and the European economy would slow dramatically when the Greeks defaulted. Has any of that come to pass?
What could make the economy come to a screeching halt now? All I can imagine is a Santorum victory in November. Even a Romney win might not slow it much. Obama has done a pretty good job, even with Republican obstructionism, to put the economy back on a sound footing.
The next step of course is to improve it so the middle-class can come roaring back with better pay more commensurate with productivity improvement. That will probably only happen if Dems take the gov’t in sufficient numbers on election day. Nothing more than continued low taxes, high gov’t debt and corporate profit will follow from a Republican victory.
Charles II said
Hm.
Maybe you should read this, Mark.
As for Obama saving the known universe, the Fed probably did more than Obama. As I have pointed out, the entire Obama stimulus was way too small to turn the economy on its own. Even the addition of a payroll tax holiday (roughly 90B annually) is 0.6% of GDP. The output gap at the start of the recession was 8%. It has only been reduced to 6%.
That’s a pathetic record. Better than going Greece, but pathetic.
Yes, this is an election year, and the economy generally does pretty well during an election year. Germany has taken extreme steps with respect to Greece in part because their elections are not all that far off.
But I can tell you this: the economy is not in better shape than it was in 1998.
The odds of the Dems retaining the Senate?
I’d rather bet on VIX.
MarkH said
I don’t recall anyone saying Obama saved any universe, known or not. And, speaking of that, do we really really know our own universe? I think not. Anyway, I digress…
Yes, the Fed did a lot. The Americans who are calling to an end of the Fed are very very wrong. Yes, the stimulus was too small. Tell the Republicans and thank Olympia Snowe we got any.
On “output gap” I think it’s largely irrelevant. Where we were before was piled on top of a lot of credit and the economy’s fundamentals weren’t very sound. They’re not perfect today, but we’re moving in the right direction.
I agree we’re not yet in equivalent shape to 1998 or even 2004, but many things have been fixed or tackled or changed and it’s just hard to do everything quickly. Congress moves soooo slowly and the Republicans are happy to keep it that way.
Give Obama a Dem Congress and I feel certain we’ll see some more change of the kind we need.
Who will win depends upon the candidates, their ideas, their delivery and whether they can hit a 3-pointer from 25 feet. :-)
Charles II said
Mark says, “On ‘output gap’ I think it’s largely irrelevant. ”
hooboy.
Where to begin?
I think I will just leave that one there and tiptoe quietly away.