VIX “Trixs” the Crowd

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Below is a quick review of some macro indicator we watch on a daily basis.

Our readers know we watch the JPY closely. When the JPY weakens, the stock market (mainly the US) tends to rise, and when the JPY strengthens, equity markets tend to fall.

Why this relationship?

The JPY is a great “mood” risk indicator due to the carry trade, investors use the JPY to fund cheaply due to low rates in Japan, sell it and buy the USD, all in order to buy riskier assets such as US stocks.

Depending on global correlations, the JPY tends to move in tandem with other equity markets at times as well.

The JPY reversed on the big 114 level and has traded down to first support levels. Note the 100-day average right here as well as the trend line. Despite “everything” feeling so bearish, one of the bigger risk indicators has actually traded relatively calm over past sessions.

 

Below chart shows the JPY (white) versus the SPX (orange) since the March lows earlier this year. Note the two have moved in tandem, but lately the gap has widened as the SPX has sold off much more than what the JPY is “indicating”.

 

The same chart since the October sell off.

 

VIX has spiked rather big over past days, and once again we hear pundits on media telling us markets should collapse as VIX has spiked higher again.

 

Sure, the VIX index has spiked, and even more importantly, the VIX curve is once again “stressed”. Short term VIX futures have shot up much more relative to longer dated VIX futures. Below is the spread between the 1st versus 6th month VIX futures. It definitely trades stressed.

 

But is a spike in VIX as well as the curve trading “stressed” a sign market will collapse from here?

We leave the longer-term projections to pundits to outline, but since the October sell of started, every local low has been accompanied with the VIX futures curve having spiked. The circles below are all levels where the 1 vs 6-month VIX curve traded at levels we are seeing right now.

Why not a fearful bounce, just to frustrate the crowds again?

 

Source: charts by Bloomberg

 

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