Why Is The VIX Not Higher (Or Much Lower)?

Tyler Durden's picture

People always stop and stare at traffic accidents (no matter how minor) and arguing couples (no matter how unattractive); ConvergEx's Nick Colas has the same problem with the ever-moribund CBOE VIX Index, even though it’s essentially the exact opposite of the proverbial train wreck.  Even with the zombie-like march higher for US stocks, surely the uncertain state of the world would demand more than a 13-handle VIX?  Well, it doesn’t; and Nick offers up some off-the-beaten track explanations for why “13” isn’t the right answer.  Implied volatility should either be higher or…  (gulp)… much lower.  The biggest overlooked factor for both directions: the role of technology in society and commerce.



Via ConvergEx's Nick Colas,

Remember the bright red convertible driven by John Travolta’s character in the movie Pulp Fiction?  It’s the one he used for his date with the boss’s wife, which started with dinner and dancing but ended with syringe to the heart.  Well, that car was actually Quentin Tarantino’s personal daily driver, and it was stolen during the making of the movie.  After 19 years on the run, police finally found it two weeks ago.  And Quentin will get it back.  “And you will know my name is the Lord when I lay my vengeance upon thee.”

I can’t but feel a little jealous that even Quentin’s cars – let alone the writer/director/producer himself – lead a more exciting life than I do.  Who knows what has happened to that red Chevelle, or in it, or around it, over the last 2 decades?   Let alone that Uma and John created their own little bit of movie magic riding around LA in the car.  And let’s not even discuss how Tarantino will celebrate its return.

At the other end of the excitement spectrum, we have the sleepwalking U.S. equity markets and an equally somnambulant CBOE VIX index plodding along in its footsteps.  The drip-drip-drip move higher for domestic stocks certainly fits the bill for a low volatility environment.  The old saw that markets take the stairs up and the elevator down has never been truer than now.  And this market feels like it is an old man walking up those stairs, arthritic knees and all.

Since the VIX is a short-term measure of expected volatility – 30 days  - it should be no surprise that it hews closely to the actual volatility of stocks over the last month.  At the same time, a 13.X VIX reading is unusually low for this indicator.  The long run average is 20, and it strains credulity to think that current macro conditions are less volatile than the last three decades.  Just consider that the VIX hasn’t closed above 20 at any point in 2013.

The common wisdom for this seemingly anomalous reading is as follows, albeit in fairly broad strokes:

  • Federal Reserve money printing in the form of $85 billion/month in Quantitative Easing creates significant excess liquidity in the financial system.  Some of this money ends up sloshing into stocks.  The Bank of Japan’s recent announcement to pump even more capital into its system is adding even more fuel to this fire.
  • Global economic reports of late have been disappointing, spurring belief among market participants that the era of low interest rates and central bank liquidity operations will continue longer than previously thought.  It might sound weird – because it is – but that is good news for stocks if you believe the prior point.
  • The global financial system is now more concentrated than before the Financial Crisis, meaning that large institutions, primarily banks, have the explicit backing of the world’s governments.
  • Interest rates are so low that capital must shift to stocks to achieve reasonable returns.  This process is very slow, however, begetting the “Grind higher” type of equity market we witness on virtually a daily basis.

Yes, these are ultimately unsatisfying answers, I grant you.  Offsetting those points is one simple fact: global economic growth is slow and listless, meaning that recession stalks the ongoing rally like a wolf around the flock.  Investors may be moving into stocks for their potentially higher returns, but the uncertain outlook means they are electing to put money to work at the low-volatility end of the equity risk-return continuum.  If there is less demand for the options-based “Protection” which the CBOE VIX Index ultimately tracks, it may well be because low-vol investors already feel hedged by virtue of their allocations.

Thinking outside the box for a moment, there may well be larger forces at work than just central banks or asset allocation dynamics.  Perhaps the historical comparisons the VIX of old don’t properly account for how the world has changed.  A few thoughts here:

  • The role of technology and data analysis in corporate decision-making.  The last 20 years have brought us the Internet, social networks, mobile computing, and huge leaps in database analysis.  Large corporations have more useful information than ever before to understand their customers, supply chains, competitive position and cost structures.  It’s as if the Porter Model went from spreadsheets and 50 page board presentations to real time analysis and highly predictive models, all in about 5 years.
  • While I have not seen much study on the subject, there does seem to be a strong correlation between this new level of business insight and the level of corporate spending, especially on new hires.  Perhaps firms are able to do more with less – the classic substitution of capital for labor.  Or, the explanation may be that businesses no longer add staff or investment in the hopes of a stronger recovery.  This was the traditional approach, after all, and gave economic recoveries some momentum to reach escape velocity.  Either way, the new and larger role of technology in corporate decision-making may well be reducing the volatility of earnings and therefore the equity markets overall.
  • Less competition in many industry sectors.  Recessions do have value, despite their tremendous human cost.  Economic expansions always misallocate capital somewhere.  In the 1990s, it was dopey Internet companies.  In the 2000s, residential housing was the epicenter of a large bubble.  Even the 1980s had its overinvestment in sovereign and high yield corporate debt.  And in every case, the subsequent recession cleaned up the mess and set the table for the next party.
  • We’ve been through a harsh recession and a disappointing recovery, which means that lots of capital left the economy and not much has returned.  And, as we’re seeing with the current record high levels of corporate earnings, this isn’t all bad.  Moreover, equity markets don’t just look at today’s bottom line; they also try to discount how long into the future they might last.  Less new competition, because businesses large and small do not want to take risks, is predictably good for the stock prices of existing companies.
  • What’s really new?  One reason why the Financial Crisis hurt markets and global economies so badly is that very few policymakers really saw it coming.  That meant that they had no toolbox of solutions at hand to deal with the liquidity crisis after Lehman Brothers or the meltdown of Greek financial system.  At the same time, they do – sort of – have a playbook now.  It’s a brute force set of plans, to be sure…  Some leverage here, a little deposit taxation there…  But it is a plan. 
  • To get market volatility to move higher, we may need a different kind of crisis from the one we’ve just finished.  It might be geopolitical, but something like North Korea doesn’t really fit the bill.  Too small… Too weird…  Maybe something health related, like the latest flu strains making their way around Asia.  Personally, I believe it could be a large-scale hack of a significant financial institution or government agency.  Computer attacks have gone global, after all, and are increasingly state sponsored. 

In summary, there may well be other valid reasons for the low levels of market volatility at the moment.  And perhaps some explanations for why it may remain so.  In the end, however, the phrase “This time is different” is a useful warning.  It never ever is “Different”.  Until it is.

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DormRoom's picture

Could the plunge protection team buy inverse/non-inverse VIX ETFs to influence a major input variable for all algos.  Low volatility helps the algo.

wee-weed up's picture

Low volume helps low volatility.

Manthong's picture

VIX?  Maybe their VapoRub is best used as a hemorrhoid treatment for sorry-assed bankers.

BLOTTO's picture

Why should it be high when their is nothing to fear? /sarc


VIX is a trademarked ticker symbol for the Chicago Board Options Exchange Market Volatility Index, a popular measure of the implied volatility of S&P 500 index options. Often referred to as the fear index or the fear gauge, it represents one measure of the market's expectation of stock market volatility over the next 30 day period.

FreeMktFisherMN's picture

Those UVXY, TVIX, etc are ridiculous. Many times I'll check EOD and they move from upper left of screen to lower right. 


It's amazing how low it is. That crash last week showed yet another reason why this is a house of cards the whole thing. So much for 'liquidity.' 

Croesus's picture

It's called "The Calm Before the Storm".


May should be quite the month.

Bunga Bunga's picture

It's called Central Planning.

Cdad's picture

It seems to me that the debate about whether or not the VIX was too high just now, or too low...was settled on AP Fake Tweet day.  Don't ya think?

88888's picture

Buy calls? Or sell Puts? "When the markets are the way they are now, where they keep ignoring the blatantly obvious signs of slowing, we are inclined to see heavy up days in the VIX." http://www.tradingvix.com/2013/04/market-euphoria.html

Dr. Engali's picture

In 1987 everybody had "portfolio insurance " and that caused the system cascade. Portfolio insurance has probably never been cheaper and the fed has lulled market participants into believing they don't need it. Combine that with the lack of short sellers, and the next crash is going to be interesting when the plunge protection team tries catching a bidless market.

Croesus's picture

@ Dr. Engali:

Isn't that called "Catching a falling knife"?

I sleep well at night, knowing that my stored units of labor, are safely underwater.

Dr. Engali's picture

There won't be a falling knife to catch. The market will vaporize.

Croesus's picture

Haha, true.

And people thought I a fool, for buying the barbaric relic.


Turin Turambar's picture

Fool?  Nah, more like crazy...  crazy like a fox.  ;-)


e-recep's picture

fair enough. the fall will be fast and deep. way faster and deeper than that in 2008.

target for gold-to-dow ratio : 1 or less.

Unique Snowflake's picture

What makes you think the PPT wont be 80% of the bid, just like in bonds? One day the mathematical reckoning will happen, but the filthy govt can change the rules many times to make sure no people but them profit from it.

Seer's picture

"the next crash is going to be interesting when the plunge protection team tries catching a bidless market"

Yup, that "can't push on a string" thing...

MythicalFish's picture

What happened to Chris Cole? Don't think Colas is the man for the (Vix) job.. Sorry.


Much higher or much lower? Gulp indeed.

butchee's picture

Simon Potter wants some recognition for a job well done.

W T F II's picture

O K..."Good Job, Simon"...Keep up the good work...!! How's that..?

Cabreado's picture

Because there is a collective force in play where everyone knows there's that pesky little trip wire in the room, and not a soul wants to bump the thing.

EARLPEARL's picture

i wish someone could explain this low vix....CAUSE I AM REAL BAD STUCK....i now own 35,000 shares of tvix with a 4.15 average....so one of you know it alls please comment and explain it....

W T F II's picture

I own a boat-load of that name myself. Just hold, especially now. Cycle targets are astoundingly high. How does 25.57 grab you in the immediate term, with multiple times that in the Summer and possibly sooner...? But, know this, if it all REALLY melts down...sell and just buy straight up SPYs, because 'they' will invalidate these levered ETFs and ETNs...it's all in the FINE PRINT...Remember, Corzine actually COULD co-mingle and squander the CLIENT funds....and he DID....!!

Enjoy the ride...

Jackagain's picture

Well.....you could send a quick tweet about a certain half-breed dictator who ran into some bad luck at the White House...wait a few seconds and sell. Hey, JPM does it all the time on the COMEX.

DormRoom's picture

2x ETFs are notorioius for losing investors $$ from rebalancing.  The best time to own them are when the underlying assets are moving in one direction for an extended period of time with low volatility, otherwise ETF rebalancing will greatly erode profits.  ETFs aren't structured for a buy and hold strategy.

Scritchy's picture

Best explanation I've heard is that in this market, anything that can be rigged will be rigged. The old days of study and analysis are long gone. Get unstuck by converting to non-floating life preservers (wink-wink, see comments above).

Awakened Sheeple's picture

The world is a fart and a whisper away from economic collapse and the vix is at 13... Unbelievable.

About VIX ETFs...Contango. TVIX is vulnerable to decay as front month futures are rolled over on a daily basis. TVIX and UVXY are losing bets unless futures are in backwardation. You should not be holding these things for longer than a few days. They are awesome for day trading though if you have a good system for timing short term cycles.

W T F II's picture

That is patented HORSESHIT spewed by Wells Fargo Wealth Advisors and other clowns who are ordered to keep folks out.

Trust me, the BIG BOYS are all over this stuff. 40,000 near-in May ATM VIX options were scooped today by one buyer.

Yes, there is contango. But, these are drop protection instruments, particularly cheap here and now. It is worth buying them monthly until we crack...The leverage, etc.

Think of it as insuring your '65 Ferrari GTB and driving to the South Bronx every night for hookers on crack...It's worth the premium


FreeMktFisherMN's picture

UVXY is a pain to file taxes with. It's a 'partnership'. Agree that the UVXY especially pops some days, like 30%. These things are getting more and more tempting. Dollar cost averaging doesn't seem to be wise because they are leveraged and the NY Fed's favorite thing to short. TVIX doesn't move as much as UVXY, and looks like another reverse split coming. 

electricgorilla's picture

The Vix is tied to the S&P 500 and the fact of the matter is the S&P 500 hasn't been volatile at all....plus ETF's has questionable 'cost of carry' charges that eat into your possible gains

W T F II's picture

Colas has been all over the media of late. Here, he points to absolutely NO metrics to supprt his case. He does not even mention some of the drags or propellents. Better technological tools..?? I wish he would describe just ONE that he used when formulating this mess. Obviously, he used no tools whatsoever and simply spouts re-tread opinion. And a banal recitation it is..!!

A waste of everyone's time

monkeyshine's picture

I am glad someone took to this thesis. Because even the idea of a market that has no choice but to "grind higher" suggests it takes a lot of work. The low VIX implies it is not a grind at all, but more like a magic carpet ride.

EARLPEARL's picture

i am cosidering buying 20,000 more tvix at 2.80....tell me why that is bad idea

Awakened Sheeple's picture

Earl, see my post above. A warning. Many people have gotten slaughtered holding these things.

W T F II's picture

Contango, Schmango...when it blows, TVIX'll GO...!!

EARLPEARL's picture

i am great poker player...do you think i should refuse to play in a game with 9 rich beginners because the HOUSE RAKE is too high...i understand the risks..but i also hve seen the vix over 50 several times in last 5 years...what would you use to bet on a coming spike in the vix.  thanks

W T F II's picture

great analogy...my pick is UVXY Jun 30 calls for 5c...!!

Awakened Sheeple's picture

Oh, if we go into a bear market or have a nasty correction these things are going to go nuts. SPXU is probably a safer play because of the contango. But agreed something is in the works and we're headed for a correction (or not, who fucking knows). But as mentioned above, if the financial system starts imploding, paper is going to burn. You might want to take profits early and get out before SHTF.

W T F II's picture

A wise purchase at this level...i m H o...When it goes...well, did you ever try to catch an AC Cobra..?? Just the noise makes you back off...!! Same with TVIX 0-60 in nanoseconds...

Frank Zappa's picture

The rationale in the article for a lower VIX are B.S. 

Anyone disagree?

"Those executives have plooked the phuck out of me."


W T F II's picture

F Z,

I agree. F them. Don't Eat Yellow Snow is another thing they'll try to keep you away from...They want it all for themselves...

Long Sticks and Stones's picture

Put in a low bid tmrrow on uvxy around 6 and should be ok. May even go lower on eu rate cut, but any shenanigans and the vix could pop to 20. Hard to say what kinda of craziness could set off the vix though considering market fundamentals certainly wont but hacked ap newswire will. And tracked it quite well which is unusual. Uvxy tracks the vix like a carnival cruise ship with a trolling motor. Timing is everything. So don't get hung out to dry. Pigs get slaughtered was never truer than with uvxy. I don't see the vix below 12.75 so good buying opportunity and set your stops for 8 in case of another flash crash but you may get stopped out on a real crash. It's a mexican standoff at this point.

Long Sticks and Stones's picture

Put in a low bid tmrrow on uvxy around 6 and should be ok. May even go lower on eu rate cut, but any shenanigans and the vix could pop to 20. Hard to say what kinda of craziness could set off the vix though considering market fundamentals certainly wont but hacked ap newswire will. And tracked it quite well which is unusual. Uvxy tracks the vix like a carnival cruise ship with a trolling motor. Timing is everything. So don't get hung out to dry. Pigs get slaughtered was never truer than with uvxy. I don't see the vix below 12.75 so good buying opportunity and set your stops for 8 in case of another flash crash but you may get stopped out on a real crash. It's a mexican standoff at this point.

Herkimer Jerkimer's picture




Anybody figurin' the VXX is going to do a reverse split soon?



Kreditanstalt's picture

"...the current record high levels of corporate earnings..."

I never could see where THIS is coming from...all I can see around me down here on the ground is heavily overindebted people, losses of jobs, for sale/for rent/for lease signs, government spending, more government spending and flyblown failing small businesses...


Who's buying their stuff?  And with what money?