The Real Story: VXX Volumes
(“VIX” is the index, and “VXX” is the ETF that tracks the index.)
These measurements are helpful as a quick check on market sentiment, but they only really measure the market’s confidence in the companies that comprise those indices. If we want to measure something much more abstract–namely, the market’s expectation of a market crash–we can look at the VIX. This measure of volatility is often called the “fear index” because it rises with uncertainty and fear that the market will crash. For instance, during the U.S. debt downgrade of 2011, the VIX spiked.
One ETF that essentially tracks the VIX is the iPath VIX ETN (VXX), and this ETF rose sharply Monday morning and stayed high throughout the day. The VIX was in a relatively stable decline throughout 2013, so what we are seeing today looks like a change in direction.
This tells us that, at least on Monday, volatility is up. The VXX price will go up as the market reaches a consensus that volatility will go up and its price will go down as the market begins to agree that volatility will fall. So now, the market is closer to agreeing that volatility is on the rise.
On the surface, this looks like a significant change, but the real insight that VXX offers us goes much further. VXX is used in very short-term trades by macroeconomic-focused investors. A higher volume of VXX trades will mean greater market activity around volatility. In other words, shares of VXX trade hands more when the market is anticipating larger changes in volatility than in the past. So to measure the market’s expectation of greater volatility (as opposed to just measuring volatility itself), we need to look at VXX volumes.
| Date | Open | High | Low | Close | Volume | 5 Day SMA |
|
4-Oct-13 |
15.36 |
15.55 |
14.96 |
15.06 |
47970853 |
54565382 |
|
3-Oct-13 |
14.75 |
15.85 |
14.68 |
15.17 |
86705149 |
50427838 |
|
2-Oct-13 |
14.48 |
14.77 |
14.31 |
14.63 |
41880945 |
39810895 |
|
1-Oct-13 |
14.71 |
14.76 |
14.18 |
14.18 |
41162264 |
39682694 |
|
30-Sep-13 |
14.83 |
14.89 |
14.33 |
14.7 |
55107701 |
42270119 |
|
26-Sep-13 |
13.69 |
13.86 |
13.59 |
13.62 |
27283132 |
39369866 |
|
25-Sep-13 |
13.9 |
14.09 |
13.74 |
13.89 |
33620434 |
49451469 |
|
24-Sep-13 |
13.93 |
14.09 |
13.69 |
13.94 |
41239937 |
49694349 |
|
20-Sep-13 |
13.6 |
13.85 |
13.45 |
13.84 |
54099393 |
48877302 |
|
19-Sep-13 |
13.47 |
13.74 |
13.42 |
13.58 |
40606432 |
44316454 |
|
18-Sep-13 |
14.25 |
14.44 |
13.49 |
13.65 |
77691149 |
43956048 |
|
17-Sep-13 |
14.29 |
14.3 |
14.12 |
14.18 |
34834835 |
35451666 |
|
16-Sep-13 |
14.13 |
14.44 |
14.1 |
14.33 |
37154701 |
40712149 |
|
13-Sep-13 |
14.43 |
14.76 |
14.36 |
14.48 |
31295151 |
39774630 |
|
12-Sep-13 |
14.43 |
14.74 |
14.22 |
14.7 |
38804404 |
45289497 |
|
11-Sep-13 |
15.02 |
15.08 |
14.41 |
14.47 |
35169239 |
43237030 |
|
10-Sep-13 |
15.07 |
15.18 |
14.94 |
14.94 |
61137248 |
43453066 |
|
9-Sep-13 |
15.94 |
16.04 |
15.42 |
15.52 |
32467107 |
42284328 |
|
6-Sep-13 |
15.76 |
16.57 |
15.72 |
16.12 |
58869487 |
|
|
5-Sep-13 |
16.32 |
16.38 |
15.94 |
16.01 |
28542069 |
|
|
4-Sep-13 |
16.41 |
16.52 |
16.24 |
16.34 |
36249418 |
|
|
3-Sep-13 |
16.28 |
16.75 |
16.21 |
16.41 |
55293561 |
The table above tells us very clearly that market expectations of volatility went up late last week, even though volatility went down on Friday.
While it’s too short of a time period to suggest a trend, a quick glance at VXX volumes suggests that the market is indeed expecting stocks to go up and down a lot more than they have in the past.
This is a surprising insight because the S&P 500 has been bound to a tight range for the past month, except for a brief spike due to the surprise lack of a taper in bond buying. Now, with this information, investors can choose whether they want to manage the risk of their portfolios by reallocating their capital, or if they want to capitalize on this volatility through a macro-focused investment strategy. Whatever they decide, a deep look into the VXX provides valuable knowledge that can help traders avoid deep losses and missed opportunities.