Last week we pointed out what seemed like a heightening amount of caution among institutional investors in terms of implied “risk” or volatility in the marketplace via the VIX, but last week after a rise earlier in the week that continued from the previous week, the VIX with a $21 handle did not persist, and finished the week sharply lower in the $17 range. Interestingly, VIX has unsuccessfully challenged its 50 day moving average on three separate occasions in the past 6 sessions, and has literally fallen back as it touches this level.
However, we noted last week that short interest in CBOE Volatility Index futures remains very high (at levels not seen since 2007), and this may provide fuel for a potential short squeeze at some point should there be an exogenous shock to the slow and steady recent equity rally. Absent from the marketplace in the early-going in 2012 is sizable directional ETF/Index options activity, although we have seen some scattered institutional hedging via puts in broad based instruments such as SPY and iShares Russell 2000 (NYSEArca: IWM). This said, as we move into March and the end of the first quarter of 2012, we would expect to see an acceleration in options activity and perhaps a lift in VIX futures and options activity as well which may present a better sense of where institutional players foresee the markets in the near term.
Nasdaq-100 Index
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