With the Fed keeping its accommodative policy, exchange traded funds that short the CBOE Volatility Index, or “VIX,” have surged alongside the rally in equities. However, another round of debt ceiling talks could throw markets into turmoil.
The VelocityShares Daily Inverse VIX Short-Term ETN (NYSEArca: XIV) increased 70.0% year-to-date, while the S&P 500 index gained 21.2%. The inverse VIX fund is showing a double top resistance level after the S&P 500 hit a new all-time high. [Indexology: If It Ain’t Broke, Don’t VIX It]
The VIX tracks market volatility, or “fear,” and typically rises when the S&P 500 falters. A bet against the VIX, such as a short or inverse VIX fund, is similar to a play on equities.
The VIX is currently trading around 14.1 – the index has an historic average of around 20. [VIX ETFs Falter as Syria Crisis Abates]
The relatively low VIX reading and outperformance in inverse VIX-related funds suggest that there is a good amount of complacency within the market.
We are heading into the October 1 deadline for Congress to pass a resolution to the current debt ceiling. However, many anticipate that Washington will drag its feet and come up with a resolution at the twelfth hour.