The construct of volatility derivatives has moved to a vulnerable state

By Lawrence G. McMillan

$VIX – the indicator which has not exactly been in tune with the negativity of this 2022 bear market – has now generated an intermediate-term trend sell signal. By that we mean that both $VIX and its 20-day Moving Average are above the 200-day Moving Average at this time. The sell signal will be in effect as long as that is the case. A previous trend sell signal occurred in December 2021 and was quite effective. In between, there was a trend buy signal, which was effective at first, but then deteriorated quickly.

In addition, $VIX is in “spiking” mode, which means that a new $VIX “spike peak” buy signal will be generated when $VIX closes at least 3.00 points below its most recent high. So far, that high price is 30.18 – registered on September 21st. There is a bit of a contention as to whether or not that 30.18 “print” of $VIX was a good print or not. It appeared to jump up to that level for a minute and then fell right back down to 28 or so. There is some evidence this morning – unconfirmed at this point – that the CBOE is revising the high price of yesterday. By the strictest interpretation, a $VIX close at or below 27.18 would generate a new “spike peak” buy signal. Recently, these “spike peak” buy signals have struggled, but they have been stopped out quickly with only small losses. In any case, we will be trading that signal when it occurs.

The construct of volatility derivatives has moved to a vulnerable state. The September $VIX futures expired yesterday, so now October $VIX futures are the front month. We are closely watching the relationship between October and November $VIX futures. If October begins to rise above November, that is a bearish sign, for it means that the term structure is beginning to invert. They are currently at about the same price, so that is right on the brink of turning bearish. We will watch this closely. In the CBOE Volatility Indices: the short-term, 9-day Volatility Index ($VIX9D) is now trading at a higher price than all of the other CBOE Volatility Indices. That is an oversold condition that will revert to a short-term buy signal when $VIX9D drops back below $VIX...

This commentary was excerpted from this morning's edition of The Daily Volume Alerts Newsletter.