Something Just Snapped In The VIX ETF Complex

As TVIX, the double-levered long VIX ETF unleashed in Nov 2010, decays to record low prices...


An unusual (and almost unprecedented) event has occurred. Just as we saw in Gold ETFs, and Oil ETFs, TVIX Shares Outstanding have exploded by a stunning 225% in the last 4 weeks... [the last 3 times TVIX has undeergone such an epic surge in demand marked a major turning point and led a violent surge in VIX]


with the largest inflows (bearish bets) on record in the last week...


The entire VIX complex is perturbed as the huge bearish TVIX flows contrast with the complacency of the steepest term structure since Nov 2014 (post Bullard-Bounce)...


And net speculative positioning at its shortest VIX (most bullish) in 2016...


We saw this kind of manic ETF creation recently in Blackrock's Gold ETF, which forced them to halt creation - for lack of supply...



In the case of the current scramble for TVIX units, forced buying of VIX futures (which explains the steepness of the futures curve) suggests VIX buying pressure is building...

As Barron's adds, volatility is back, but too few investors even know it.

Most are too focused on the CBOE Volatility Index's extraordinary collapse in recent weeks to 15 from about 28. When the VIX is low, as it is now, it tends to be interpreted as a green light to buy stocks. . .or a sign of investor complacency.


Not enough people realize that the VIX is just a 30-day snapshot of expected returns for the Standard & Poor's 500 index. A more meaningful, if esoteric, indicator is the VIX futures curve, which offers a long-term view of the stock market's perceived risk.


The curve has lately been flat, indicating little risk to owning stocks between now and more distant months. But the futures curve is now "upward sloping," as if sophisticated investors have suddenly regained visibility into what was an opaque stock market.


Nothing bores people more than nerdy derivatives measures, including VIX futures curves. But you should add this volatility gauge to your arsenal of indicators if you trade options or want to be a smarter stock investor.

Once again it appears the ETF tail is wagging the underlying market 'dog' as hedging with the 'cheapest' instrument - no matter how bad the basis - is the new normal. Remember, options markets are already medium term complacent and longer-term terrified.


As detailed previously, the VXV has been around only since 2007. Over that time, the VIX/VXV ratio has dropped to 78% on 4 prior distinct occasions:

  • March 12-20, 2012 - The S&P 500 chopped sideways for a few weeks before falling some 9% over the next 2 months
  • August 13-22, 2012 - The S&P 500 chopped sideways for a few weeks before rallying by as much as some 4% over the next few weeks. 2 months later, the index had lost that entire gain, and another 4%.
  • December 5, 2014 - The S&P 500 immediately dropped 5% over the next 2 weeks before chopping sideways for several months.
  • March 20, 2015 - The S&P 500 dropped 2.5% over the next week before moving sideways for several months.

Now there is no guarantee that stocks are about to hit an air pocket. However, given the (albeit limited) precedents, the track record in the short to intermediate-term following such readings has not been a positive one. In fact, following the prior 15 days with VIX/VXV readings below 79%, the S&P 500 was lower 3 months later 14 of the days by a median of -3.7%. The only positive return was the 1 point gain following the March 2015 occurrence.

All in all, this may not be a Defcon 5 level red flag for the market. However, for a rally that has seen scant evidence of exuberance, this is at least one of the first indications of complacency.