Is Volmageddon Coming?

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Market On Open, Thursday 26 March

by Alex King, CEO, Cestrian Capital Research, Inc.

The much-misunderstood CBOE Volatility Index, (the “Vix”) is a carefully constructed measure of market volatility in the S&P500. The methodology of calculation is available directly from the CBOE here. In essence the higher the number, the greater the volatility the market is expecting looking 30 days out. Vix spikes - a rapid increase in expected volatility - are generally caused by investors panic-buying >30dte puts when the stressful event already happened. Vix spikes are therefore usually wonderful opportunities to take the opposite position, buying long S&P500 positions in anticipation of a rapid drop in expected volatility (which, because the expected volatility was usually bearish in nature, means that the drop in expected volatility is a bullish move).

What’s harder to trade is a slow grind up in expected volatility, which has been the dominant pattern in the Vix since its December lows. I have been fascinated to watch how our family of algorithms have responded to this; they have all taken the action that we as humans should do if only we had the emotional control, which is to say as the Vix has climbed they have:

• Gone to cash if the algorithm is long-only by design
• Gone short the S&P500 if the algorithm is long/short by design

We have two families of algo services; the SignalFlow family, which are entirely numeric and know nothing of the outside world beyond pattern of the prices of the instruments they cover, and the YXI family, which are multifactor and take into account all manner of macro inputs to reach a conclusion. Both families are assuredly at risk-off right now.

I trade our algorithms myself, so as well as delivering good outcomes in this difficult environment it has been an educating experience. I am fairly sure that if I had no robot buddies I would be making more trades and taking on more risk; that may work out or not, but anyone old enough to have seen a few crises will tell you that sitting back, keeping capital safe and being ready for the next big move usually beats living on a high wire hoping you positioned correctly ahead of time.

Mr. Vix put it well yesterday thus:

When the war ends, as it surely will - in a day, a week, a month, a year, five years, I don’t know - the market will rip upwards. It’s good to be ready to react.

If you’d like help preparing for such an event, reach out to us using this contact form or e-mail us at minerva@cestriancapital.com.

Are Stocks Dumping?

Let’s take a look at equities, bonds, oil, crypto, key sectors and key international markets. We do this each and every day in this note.