Connect with us

Hi, what are you looking for?

Stocks

VIX Index Above All of Its Futures

The fallout from the SVB (Silicon Valley Bank) collapse has finally put fear into the hearts of investors, and especially options traders, pushing up the VIX from the low 20s to a close of 26.14 on March 15, 2023. That took the VIX Index up above the prices of all of its futures contracts, which creates a unique oversold sentiment situation that is the subject of this week’s chart.

For any sentiment indicator like the VIX, analysts want to know what “high” and “low” readings consist of. Some use static numerical levels for the VIX, which is a problematic approach, as the normal levels for the VIX can vary a lot over time. Others (including me) like to use dynamic thresholds such as Bollinger Bands.

VIX Index futures contracts first started trading in March 2004, and I have found that the VIX futures market offers us a good way to benchmark what “high” or “low” VIX values are. The VIX Index is determined by the prices that traders set for S&P 500 options, and when they price in more risk premium into those options in comparison to “fair value”, it is a sign of greater fear and, thus, a bottoming condition for prices. The traders of VIX futures necessarily have to take a longer-term approach, with those contracts usually extending out as much as 8-9 months into the future, and so the prices that they set serve as a good way to see what other speculators think is a fair value for pricing in the VIX at the expiration points in the future. When the spot VIX moves too far above or below its futures contracts, it signals a big disconnect between those two camps. And it provides us with useful information.

Most of the time, the VIX Index is quoted below all of its futures contracts. That is the normal state. When it goes too low below all of the VIX contracts, it shows an extreme of optimism among the options traders. In the chart above, that condition shows up as a high reading for the indicator, which measures the spread between whichever VIX futures contract has the highest price minus the VIX Index. Such a condition is a pretty good indication of a price top, although it can take a while to matter.

Right now we have the opposite condition, wherein the VIX Index is above all of its futures contracts. That produces a negative reading on this chart. Such readings do not come along very often, and they are pretty good indications of a bottoming condition for stock prices. The direct message is that the S&P 500 options traders who drive the VIX Index are feeling more fearful than the VIX futures traders believe is merited. 

With any overbought or oversold reading on any indicator, it is important to realize that it represents a “condition,” and is not a “signal.” The market has no requirement to respond in the way that we think it should, just because we notice some reading on an indicator. The VIX has been higher than 27 lots of times in the past, and could very well go higher than this current reading in the days ahead. That’s possible. But the message, for now, is that the market selloff has done enough to instill a decent condition of fearfulness into the hearts of traders.

    You May Also Like

    Business

    The head of the International Monetary Fund has warned of increased risks to the stability of the financial system after weeks of banking sector...

    Business

    1.22 billion people use Instagram every month. That’s a huge number of Instagrammers trying to hit it big on the platform all at the...

    Business

    Since the rise of online casinos, cybersecurity has become a major concern for both casino operators and players alike. The transactions that go around...

    Business

    The Home Office has made next to no progress in tackling criminal fraud during the past five years, despite it having become Britain’s most...

    Disclaimer: rightdecisionnow.com, its managers, its employees, and assigns (collectively “The Company”) do not make any guarantee or warranty about what is advertised above. Information provided by this website is for research purposes only and should not be considered as personalized financial advice. The Company is not affiliated with, nor does it receive compensation from, any specific security. The Company is not registered or licensed by any governing body in any jurisdiction to give investing advice or provide investment recommendation. Any investments recommended here should be taken into consideration only after consulting with your investment advisor and after reviewing the prospectus or financial statements of the company.

    Copyright © 2023 rightdecisionnow.com | All Rights Reserved