VIX volume record could be canary in coal mine

June 25, 2012 12:50 PM
Volume of fear rising:be careful out there

Last week while speaking to a colleague, we both noted that there were quite a few ominous stories coming out that seemed to be raising the temperature of markets. I was looking at the lack of follow through on the MF Global situation by Congressman questioning JP Morgan Chairman and CEO Jamie Dimon but there was also the speculation on whether or not the Federal Reserve would announce a QE3 (they continued their Twist program) and stories regarding the imminent downgrade of many of the  world’s largest banks by Moody’s

I mentioned this to my wife, who is never too interested in the markets and she chided my tunnel vision pointing out that the world was going crazy with the U.S.  Attorney General on the cusp of being held in contempt of Congress, chaos in Egypt and the Sandusky trial awaiting a verdict.

There are similarities in all of these stories in that there seems to be a rising tide of anxiety and perhaps a breakdown in our faith in institutions and assumptions of normalcy.

If there is one stream that runs through these stories, it is fear and a feeling that institutions we have trusted may not be deserving of such trust.

So it was no surprise when I saw a press release this morning from the CBOE Futures Exchange pointing out that futures on their Volatility Index (VIX), also known as the fear index or fear gauge, set record volume last week.

And while the index itself is nowhere near its all-time high, near 90, from the fall of 2008 or last summer’s spike, near 50,  or even the high from earlier this month; the fact that more people are trading “fear” has to mean something. The index, which often simply acts with perfect negative correlation to the equity markets, was actually down for the week closing at a benign 18.11 after spiking to 27.73 on June 4 when  the S&Ps dropped more than 10% from its near four-year high on March 26.

Typically spikes in volume in the VIX futures occur during volatile trading when equities are under stress. The record that was broke was from the week of August 8-12 in 2011 when the VIX spiked to 48 setting a 15-month high. Perhaps rising VIX volume is an indicator in its own right.

While equity indexes have been resilient, rebounding from every downturn to remain positive for the year and is up for June despite two of the year’s worst days, there is a sense of fear out there that is undeniable regarding what will come next. And today the VIX jumped as the markets are taking a beating — S&P down 20, Dow down 138. My boss forwarded a story on how members of Congress traded off of inside information they received while meeting with cabinet officials.

See what I mean about faith in institutions. Not sure what this all means but the markets have an edge to them these days and it would pay to remain diligent.

About the Author

Editor-in-Chief of Modern Trader, Daniel Collins is a 25-year veteran of the futures industry having worked on the trading floors of both the Chicago Board of Trade and Chicago Mercantile Exchange.