Daniel writes: “It’s been a month since the Feb 5th volatility spike. Do you think the markets are back to normal now?”
Thanks for the great question. Different people will use different metrics to gauge what’s normal and what isn’t, but in my opinion no we are still not nearly out of the woods yet. A massive VIX spike like that could have long lasting effects. It was after all the largest VIX spike since we have data going back to 1990, and likely the largest since October 1987:
The VIX index can serve as a rough proxy for how much hedging activity is taking place. Given we went nearly 2 years with some of the lowest volatility in history, a spike of that magnitude (115%) was a clear reminder of how quickly things can go off the rails and it wouldn’t surprise me if it took a very long time to get back to a VIX in the single digits again. The VIX futures market hasn’t nearly recovered yet as you can see:
“Normal” would be month 2 > month 1 > VIX index, yet we are still in a situation where the front two months are backwards and the VIX is above the futures. Not as ugly as it was a few weeks ago, but definitely not normal just yet.
We’ll definitely be trying to get into trades whenever possible. That’s one of the advantages of having safety positions within each of the individual strategies like we do. We can still try to find some windows of opportunity here and there, and move back to safety whenever it doesn’t work out.
But in general it wouldn’t surprise me if it takes the markets a little longer to establish any lasting trends. Right now we’ll just try to trade the chop.
Also just a quick note, someone pointed out to me that I actually had the wrong chart posted on my website so if anyone wants to see the correct VTS Combined Volatility chart, it’s updated now:
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