February 25, 2020
rcm-alternatives
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Did that feel like the 5th scariest day in the markets the past 20 years to anyone? Sure didn’t here in our shop, with groups like Breakout Funds, Deepfield, and others scoring gains on the Covid-19 fueled sell off. But the VIX saw it’s 5th largest spike on a daily basis in the past 20 years yesterday. 5th largest – including the dot.com boom, financial crisis, and VIXmageddon… wow.
Maybe we’re getting used to it? Or maybe there’s more to the VIX than the percentage gain over a single session would tell you (hint, hint, that’s it). You see, while that was the 5th largest VIX percentage move. It was only the 51st worst one-day decline for the stock market (SPY) since 2000, making it hardly even memorable. The VIX, it turns out, cares greatly where it is moving from and to in its aspirations as a ‘fear gauge’. We were once told to think of the VIX as a ship’s radar, and VIX spikes happening when a new ‘blip’ shows up on the screen. Contrast that to something already on the radar screen. No matter if it is a destroyer or torpedo coming right at you, if it is a known threat – it’s less likely to spike the VIX, with the VIX likely already elevated to reflect that threat.
Take the following examples, each with a market loss of -3% to -5%….and view the different VIX moves. A move bigger than the sell off today in the throes of the financial crisis in late October 2008 barely moved the VIX, moving it from 68 or so to 69 and change (yes, it was that crazy…). The SPY loss of -3.55% that day was just the market looking at one of the many known torpedoes in the water. It didn’t register any new threats on the radar screen. On the far other side of the VIX spectrum, you have February 5th, 2018 – where the VIX was at a much lower level (17, and as low as 9 a few days before that) – but doubled in price in a single day up into the 30’s. Finally – many market observers use the 9/11 tragedy as a sort of measuring stick, asking in due diligence meetings what would the strategy do in a 9/11 type move. Well, while the market wasn’t open – and the VIX print would likely have been way, way higher than it was 5 days later on the reopen… the actual prints (and what your margin calls would have been based on), were a spike of just 31% for the VIX on the close of the day of the re-open. Part of that reasoning is that it was already elevated (in the 30’s) because of the dot.com boom sell off. Spiking into the 40’s was scary, but not as scary as coming from a VIX reading of 10…
No. Not all stock market sell offs are created equally. Some are part of the current environment. Some are phase shifts that come out of nowhere. Some spike the VIX a lot. Some a little. Some not at all.
PS – if you need help trading the VIX – make sure to check out our How To Trade The VIX Flow Chart:
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