McClellan Chart In Focus: VIX Spike Takes it Above All of its Futures “..these instances nearly always mark nice short term bottoms for stock prices.” By Tom McClellan

 

Chart In Focus

VIX Spike Takes it Above All of its Futures

Chart In Focus

The scary selloff on Friday, Feb. 2 took price indicators down to oversold readings, and it took the VIX up to its highest reading since the November 2016 election.  In the process, it also rose up above the price of all of its futures contracts.  In an uptrend, that is a pretty rare occurrence.

The VIX Index is determined by how much volatility premium is getting priced into SP500 options, and so it reflects the relative degree of fear being felt by options traders.

VIX futures are different, and do not have a tie-in to any physical product, or even to any investment product.  VIX futures are settled for cash at the VIX Index’s value on the day of expiration.  And so the price of any VIX futures contract is based simply on the bets that the VIX futures traders are willing to make.  Seeing the VIX Index up above the level of all of the VIX futures contracts means that SP500 options traders are feeling more fearful now than the VIX futures traders think is warranted.VIX futures quote Feb 2 2018

Most of the time, the VIX Index stays below all of its futures contracts.  The futures traders have to price in a little bit of time-risk, in case the VIX Index rises by the time that the contract reaches expiration.  As that expiration gets closer, the price of a VIX futures contract will slowly move toward wherever the VIX Index is.

During scary price declines, though, things get out of whack and the VIX Index can rise up above the level of some or all of its futures contracts.  This week’s chart shows those instances, and they are pretty rare.

In a corrective period like what we saw in late 2015, after the China-induced minicrash, we can see multiple days of the VIX being above all of its futures contracts before the market finally reaches a bottom.  But when the SP500 is in an uptrend, like what we are arguably still in right now, these instances nearly always mark nice short term bottoms for stock prices.

Tom McClellan
Editor, The McClellan Market Report

February 03, 2018

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About the author

Sherman and Marian's son Tom McClellan has done extensive analytical spreadsheet development for the stock and commodities markets, including the synthesizing of the four-year Presidential Cycle Pattern. He has fine tuned the rules for interrelationships between financial markets to provide leading indications for important market and economic data. Tom is a graduate of the U.S. Military Academy at West Point where he studied aerospace engineering, and he served as an Army helicopter pilot for 11 years. He began his own study of market technical analysis while still in the Army, and discovered ways to expand the use of his parents' indicators to forecast future market turning points. Tom views the movements of prices in the financial market through the eyes of an engineer, which allows him to focus on what the data really say rather than interpreting events according to the same "conventional wisdom" used by other analysts. In 1993, he left the Army to join his father in pursuing a new career doing this type of analysis. Tom and Sherman spent the next 2 years refining their analysis techniques and laying groundwork. In April 1995 they launched their newsletter, The McClellan Market Report, an 8 page report covering the stock, bond, and gold markets, which is published twice a month. They utilize the unique indicators they have developed to present their view of the market's structure as well as their forecasts for future trend direction and the timing of turning points. A Daily Edition was added in February 1998 to give subscribers daily updates on their indicators and also provide market position indications for stocks, bonds and gold. Their subscribers range from individual investors to professional fund managers. Tom serves as editor of both publications, and runs the newsletter business from its location in Lakewood, WA.