19 July 2017: VIX up, UVXY down

For the second day in a row, the VIX went up, yet UVXY ETFs went down. Some people might wonder: what is going on? In almost 90% of the cases, these metrics move in unison, since both are indicators of market volatility. And in most cases, a deviant pattern one day is compensated by the opposite deviant pattern the next day. However, once or twice a year, it happens that the same deviant pattern occurs two days in a row. (And once every five years, this can happen for three consecutive days.)
How can such a deviant pattern occur? Time is the answer. The VIX index value quotes the expected annualized change in the S&P 500 index over the next 30 days. The value of UVXY ETFs is based on the S&P 500 VIX Short-Term Futures Index. This index utilizes prices of the next two near-term VIX futures contracts. The calculation of the exact values is somewhat more complicated, but basically it comes down to this. Traders of (instruments that underlie) the VIX have a somewhat different appreciation of the risks that threaten the markets than traders of (instruments that underlie) UVXY ETFs. In the case of the previous two days: traders expected volatility to be on the rise for the short term, but expected it to ease for the somewhat longer term. The difference in appreciation of future risks is usually subtle, but especially under circumstances of (very) low volatility, it can lead to substantial differences.
How long will this go on? Data over the period since the introduction of UVXY ETFs (October 2011) show that deviant patterns are always corrected within a few days. In more than one case, unusual patterns turned out to be an indicator for market turmoil. In 2013, the VIX shot up more than 13% after the occurrence of such a deviant pattern. And it was only two months ago that the VIX jumped more than 50% after the latest instance of the VIX-UVXY-discrepancy.

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The S&P 500 and the NASDAQ closed at record highs on Tuesday, mainly driven by gains in tech stocks. The S&P 500 gained 0.06% and the NASDAQ added 0.47%. The Dow was the only dissonant for the day: it closed 0.25% lower. Volatility showed a mixed picture: the VIX took another step up from very low levels. It still did not reach 10 points, closing at 9.89, adding 0.71%. UVXY ETFs had a good start, adding more than 4% intraday. Nevertheless, they closed with a loss of more than 2%. XIV ETNs closed more than 1% higher.
Danny Daredevil is the only model that is holding UVXY ETFs. Danny’s RSS dropped to 212%. He is back to levels of exactly one year ago. In that period, Danny reached an RSS of more than 500% three months ago. A lack of volatility has since then decimated Danny’s return. Adventurous Anny is still holding cash: her RSS remained at 33%. Solid Suzy and Lazy Larry keep smiling: their RSS closed above 37% yesterday.
None of our models gave a trading signal at the end of yesterday’s session.

Model Holds Start date

RSS

YTD

QTD

AAR

Danny Daredevil UVXY 1 January 2016

212.84%

-22.39%

-28.13%

109%

Adventurous Anny Cash 6 March 2017

32.57%

32.57%

-4.39%

114%

Solid Suzy XIV 6 March 2017

37.28%

37.28%

9.68%

136%

Lazy Larry
XIV 6 March 2017

37.28%

37.28%

9.68%

136%

RSS = Return Since Start | YTD = Year-To-Date | QTD = Quarter-To-Date | AAR = Average Annual Return

 

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While strolling through Breda city, René halted at one of the many creative chalkboard slogans that are strategically positioned near the entrance of bars and restaurants.
This one had him puzzled for a while — a professional bias, probably enforced by all these bulls that have been on our tail recently?