Smart money vs. dumb managers in VIX, SPX

Equities trade firm with yearend in sight. There appears to be more concern from money managers lagging the index and missing out on any late year run.  Additionally, these funds may not want to show yearend positions well under-invested. As such, SPX index has marched slowly forward over the last four sessions following a strong upside break-out on the day the Fed announced tapering plans.

The VIX, which we have been following closely since April of this year, is again nearing an important support. Straining your recollections, I point to a bullish support that was crystallized in the ‘bullish window’ that was opened between Friday, March 15 and Monday, March 18. This bullish window has offered fantastic VIX support and indicated many brief toping patterns in the SPX. The window was partially closed on April 12 at 12.06 settle and further on Aug. 5 at 11.84 settle.  However, the window remains open and bullish support continues to be expected at or about 11.52, until such time as the VIX settles below this level.

I expect this VIX bullish window will be closed at some point in 2014 and that this will usher in a multi-month period of very placid equity gains with little extreme volatility. I am not as certain that we are on a straight line path to settle below 11.52 in the VIX, but rather would be concerned that there is another strong reaction higher awaiting in the VIX. Money managers chasing the index may be the driving force today, but the driving force may be smart (and very patient) money may decide to take profits any day.

There is little sign in the equity indexes that indicate an abrupt bearish reverse forthcoming, but until the VIX reaches below the bullish window and falls on settlement below 11.52, the March 15th opening level, there is room to benefit from owning volatility and very low risk put spread positions in S&P should be considered.

About the Author

Martin McGuire, managing director at TJM Institutional Services

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