The VIX Becomes Worthless, Again (VXX, VXZ)

The CBOE Volatility Index or “The VIX” has turned worthless as a market indicator.  This happens from time to time, and it is often followed by rapid change.  Today the VIX hit a 52-week low of 18.70 and it sits at 19.06 late in the day.  What is interesting is that this was not just a 52-week low in the volatility.  The last time the VIX was this low was August-2008, right before the everyone thought the next wave of the financial markets was upon us.   The iPath S&P 500 VIX Short-Term Futures ETN (NYSE: VXX) and the iPath S&P 500 VIX Mid-Term Futures ETN (NYSE: VXZ) are the two ETF/ETN products which trade around the VIX.

The higher the VIX, the higher the volatility.  I noted that the VIX had started turning worthless back on October 19 when the VIX was hitting steadily in the low 20’s…. It then rose rapidly to over 30 by the end of the month, which corresponded with a 4% drop in the DJIA and a 5% drop in the S&P500 during the same period.  In that article then we gave more explanation because the rally was still fresh, but now it isn’t.

It is impossible to know if the same will happen this time with a rapid change or not. The VIX can go through extended periods of being dormant.  But one thing is true when the VIX gets this low and after you have seen such a strong rise in the stock markets… buying Puts for downside protection to assure gains stay locked-in is generally cheaper than ever.

The iPath S&P 500 VIX Short-Term Futures ETN (NYSE: VXX) is down 2% at $29.71 and the iPath S&P 500 VIX Mid-Term Futures ETN (NYSE: VXZ) is down 0.4% at $72.20.

JON C. OGG