Alright, well with the VIX still at a 14-handle (as we write this) and having covered its sudden spike earlier this morning before lampooning an ill-timed news alert about just how “laughable” it is to put on hedges, we thought we’d point out something else you should be paying attention to.
Namely, VVIX – or, vol. of vol.
That’s been interesting to watch this year as the underlying’s tendency to “mean revert” rapidly on any spike (part and parcel of the BTFD mentality) has kept vol. of vol. elevated. “The frequent occurrence of sharp, short-lived shocks justifies a high vol of vol,” BofAML wrote early last month, when discussing the disconnect between VVIX and credit spreads:
Well fast forward to this morning and VVIX is on pace for its highest close since December of 2015.
Here’s the intraday:
And here’s the bigger picture:
Meanwhile, Bloomberg’s Cameron Crise wants you to know that not only is there nothing to see here (“please disperse!“), but that you should in fact be excited.
How worried should equity investors be about the recent sharp rise in the VIX? Based on the evidence of the last decade, not only should they not be worried, they should be celebrating. My colleague Thomas Cuppernull knocked up an interesting little study to measure the subsequent 20-day performance of the SPX when the following criteria are met:
- Trailing 1m average VIX is below 15
- The level of the VIX rises 40% over a three-day period
There have been 10 such occasions over the past decade, and the SPX has rallied in nine of them, with an average gain of 3.71%. The one loss was of a similar magnitude, 3.82%, albeit with an eye-watering 8.26% drawdown at one point. The average return was 2.96%, which from current levels would propel the SPX to 2528 in a month. Of course, one might suggest that these data are skewed by the underlying bull market when the signals were generated, and that vol quickly mean reverts until it doesn’t.
Still, in the absence of a deterioration in underlying fundamentals, these results appear to suggest that the dip-buyers might win again in the end.