Transitionary Period for VIX - 2/18/2022
VIX at the daily view.
I know it's been awhile since I posted. I've been buried in work.
This year will be a transitionary year unlike last year. Twitter, Facebook, and other social media keeps comparing this to 1929 which is an intellectually lazy comparison. For example, bankers back in the 1920s were glorified accountants and the Federal Reserve didn't have any doctrines on how to handle a market crash like the Dodd-Frank Act. That and the economy today is not based on loans to farmers.
That's besides the point. Like everyone else, I've been hearing the "sky is falling" narrative for months now. This year is more likely a hybrid of 2015 and 2018. The VIX was wild back then too. To put it simply, there are more hedges due to one unknown factor. That factor is: what will the Fed's rate hike schedule actually look like? Everyone and their mothers know that rate hikes are coming. The real questions are: how big will the future rate hikes be after the first one? How fast will those rate hikes be (quarterly, monthly)? What is the end goal? Is it 2.25% (expected)? Is it 3.00% (more than expected)?
During rate hikes, that implies no more additional bond purchases (other than ordinary business). That means bond yields are elevated. That means the growth sectors get revaluated accordingly. About 35% of the ES is the tech sector. That means volatility is here to stay for several months. That means VIX stays elevated until the tech revaluation and the big unknown factor is behind us. Do you see the domino effect from macro (monetary policies) to the micro (your trades)?
No, it doesn't mean that the market will crash 50% or more. Though, I wouldn't be surprised if NQ was down 30% from the highs.
VIX will likely stay elevated for most of the year. Sept-Oct should be very volatile and wipe out both sides. If you are trading volatility, the general trading range remains roughly the same. However, you would have to shift your levels generally 5+ point up. For example, seeing VIX at 32 this year would be like seeing VIX at 27 last year. Not as impressive if you put it in relative terms.
Why are there more hedges now which keeps the VIX elevated? The market doesn't care about good or bad news. That's noise. What it cares about the most is certainty and uncertainty. Think about it. If there is a war, there is the defense sector to invest. If there is a pandemic, there is the biotech sector. What sector do you invest in if the future monetary is unknown? Uncertain. That's why the big funds are going defensive until there is certainty. There is plenty of cash/liquidity on the sidelines, but there is no certainty to place them.
It would be very hard for VIX to stay below 18 this year. That's like the VIX staying above 32 last year. That's why one should shift their levels upwards and put things into context.
The only scenario that I can see VIX breaking 50 is if the Federal Reserve announce something very shocking like hiking rates above 5% in less than 2 years. That's unlikely. Why? If that happens, that would likely cause a Volcker-style recession (1980-1982) which was the third worst recession/depression in US history. If that happens, trading will be one of the last things that you will be worried about.
I know it's been awhile since I posted. I've been buried in work.
This year will be a transitionary year unlike last year. Twitter, Facebook, and other social media keeps comparing this to 1929 which is an intellectually lazy comparison. For example, bankers back in the 1920s were glorified accountants and the Federal Reserve didn't have any doctrines on how to handle a market crash like the Dodd-Frank Act. That and the economy today is not based on loans to farmers.
That's besides the point. Like everyone else, I've been hearing the "sky is falling" narrative for months now. This year is more likely a hybrid of 2015 and 2018. The VIX was wild back then too. To put it simply, there are more hedges due to one unknown factor. That factor is: what will the Fed's rate hike schedule actually look like? Everyone and their mothers know that rate hikes are coming. The real questions are: how big will the future rate hikes be after the first one? How fast will those rate hikes be (quarterly, monthly)? What is the end goal? Is it 2.25% (expected)? Is it 3.00% (more than expected)?
During rate hikes, that implies no more additional bond purchases (other than ordinary business). That means bond yields are elevated. That means the growth sectors get revaluated accordingly. About 35% of the ES is the tech sector. That means volatility is here to stay for several months. That means VIX stays elevated until the tech revaluation and the big unknown factor is behind us. Do you see the domino effect from macro (monetary policies) to the micro (your trades)?
No, it doesn't mean that the market will crash 50% or more. Though, I wouldn't be surprised if NQ was down 30% from the highs.
VIX will likely stay elevated for most of the year. Sept-Oct should be very volatile and wipe out both sides. If you are trading volatility, the general trading range remains roughly the same. However, you would have to shift your levels generally 5+ point up. For example, seeing VIX at 32 this year would be like seeing VIX at 27 last year. Not as impressive if you put it in relative terms.
Why are there more hedges now which keeps the VIX elevated? The market doesn't care about good or bad news. That's noise. What it cares about the most is certainty and uncertainty. Think about it. If there is a war, there is the defense sector to invest. If there is a pandemic, there is the biotech sector. What sector do you invest in if the future monetary is unknown? Uncertain. That's why the big funds are going defensive until there is certainty. There is plenty of cash/liquidity on the sidelines, but there is no certainty to place them.
It would be very hard for VIX to stay below 18 this year. That's like the VIX staying above 32 last year. That's why one should shift their levels upwards and put things into context.
The only scenario that I can see VIX breaking 50 is if the Federal Reserve announce something very shocking like hiking rates above 5% in less than 2 years. That's unlikely. Why? If that happens, that would likely cause a Volcker-style recession (1980-1982) which was the third worst recession/depression in US history. If that happens, trading will be one of the last things that you will be worried about.