What the VIX in January 2008 is Telling Us About the VIX Now

Happy Martin Luther King Jr. Day! It’s an important time to remember one of our nation’s great American heros, what he advocated for, and his accomplishments.

On an unrelated note, this three day weekend is a painful reminder in the investment space… after a huge volatility spike… which was what some say was the beginnings of what later became the financial crisis if 2008-2009 {Past performance is not necessarily indicative of future results}.

We are now marking the eight year anniversary, and with the $VIX up roughly 40%, and the S&P down roughing 8%, we feel it’s important to look back on what happened so we can learn from it.

Here’s “A Different Kind of History Lesson (The VIX).”

Now, we all think back on 2008 and the huge volatility surrounding the financial crisis and Lehman bankruptcy and what not that fall (Aug. through Nov.)… but the first big warning shot across the bow was actually on MLK weekend (Jan 20^th, 2008). The calls and emails started coming in on Sunday night – as the US stock index futures started opening up 4% to 5% lower based on Asian markets having sold off around 5%. A little trip in  the wayback machine brings us this from Barry Ritholtz’s early blogging efforts:

“Holy Snikes! Dow Jones Industrial Average futures contract are off 520 points at 11,586; Nasdaq futures were at 1773.25, down 76.25. Standard & Poor’s 500 futures recently were at 1265, down 60.3. Let me hasten to remind you that this is “contained.” Imagine how much worse it would be like if it were not.”

It was a move completely out of left field, even though the VIX had been moving up steadily since 2007 and some recession warnings had been starting to surface. Hardest hit were the option selling managers – who take in the insurance premiums against just this sort of thing happening – then are forced to pay out when it does happen. One rather painful example was Ascendant Asset Advisor’s Strategic 1 options program, which up until that fateful night could seemingly do no wrong (reminding us of the famed option turkey).’

Source: Ascendant Options

So here we are 6 years later (has it really been 6 years!! wow, time flies), and the complacency in the market is starting to look a lot like it did back then – with option selling managers again leading the top performing lists and seemingly unable to do any wrong. Will this down trend in volatility, and particularly the VIX – continue? Or are we likely to start getting texts and emails and Ritholtz “look out below” warnings one Sunday night soon.  If you’re a betting man or woman – well there’s an investment for you to place just that bet on whether a spike is coming – they are option selling managers, and they’ve been right a lot more than they’ve been wrong over the past two years… but can it continue. Stay tuned…

(Disclaimer: Past performance is not necessarily indicative of future results)

For those of you not technically in the alternatives world via managed accounts, but instead doing more staid investments (heavy sarcasm) in things like the inverse volatility ETN – XIV,  your equity curve is starting to look a whole lot like the fattened up turkey before his fateful day. Although – maybe it will add another 337% over the next two years, and the two after that, and so on. It only takes 10 years at that rate to turn $10,000 into $16 million – or $1 million into $16 Billion.  Of course – the market could see some volatility like it did six years ago, or even like it did in 2011 – where your $10k could be worth $1,600, or even $160.

(Disclaimer: Past performance is not necessarily indicative of future results)