Brean Capital analyst Peter Tchir recently penned a piece wondering if the VIX volatility gauge — also known as the “fear gauge” — may be setting up for a big spike, based on the activity of associated ETFs.
Examining data going back to January 2015, Tchir focused on days where the VIX closed between 15 and 17.5, with 16.2 the approximate midpoint. Over the past two years, he found 110 such days where the VIX closed in that range.
When looking at the curve — the difference between VIX closes in that range and the second VIX futures contract, he found something interesting:
Of the 110 dates where VIX closed in that range, Friday was the 13th flattest curve (the difference between VIX and the 2nd VIX futures contract was 0.91).
As explained in prior notes, the steepness of the VIX curve tends to be a big drag on the performance of the ETFs and ETNs that investors trade. So the ‘flatter’ the curve the less drag there is on your VIX trade.
When comparing the current flat curve versus that just before the crash in August 2015:
What gets interesting is one of the other dates with a flatter curve was October 13th of this year and October 17th was the 14th flattest curve – showing a degree of stability here.
What could be concerning, is that 6 of the dates that had flatter curves, while VIX was in this range occurred in July and August of 2015. In fact on August 19th, 2015 VIX closed at 15.25 and the curve was only 0.48.
Does this mean we’re setting up for a similar crash like we saw in August 2015? Only time will tell, but it certainly makes sense to monitor the situation closely.
The iPath S&P 500 VIX Short Term Futures TM ETN (NYSE:VXX) rose $0.23 (+0.69%) to $33.66 per share in Monday afternoon trading. Year-to-date, the largest ETF tracking the VIX has plunged 76%.