The markets have grown overly complacent, with the CBOE Volatility Index and related exchange traded funds slipping to lower levels this year, as stocks continue on their eight-year bull run toward new record highs.
The CBOE Volatility Index, or VIX, is hovering around 11.8, its lowest level so far this year.
For instance, with volatility dissipating and stocks moving higher, the iPath S&P 500 VIX Short Term Futures ETN (NYSEArca: VXX) and ProShares VIX Short-Term Futures ETF (NYSEArca: VIXY) have declined 54.0% year-to-date.
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However, the sell-off in the VIX have pushed both VXX and VIXY into oversold territory. For instance, technical traders will notice that VXX is trading at a relative strength of 25.95 and VIXY shows a 26.33 reading – – readings above 70 are typically considered overbought while readings below 30 reflect oversold conditions.
The VIX, or so-called fear index, is a widely observed indicator for investor sentiment in the stock market and measures the expected or implied volatility of large-cap stock options traded on the S&P 500 index. Exchange traded products that track VIX futures allow investors to profit during rising volatility or hedge against short-term turns.
The low VIX readings often reflect times of rising stock prices and a tranquil market environment, but low VIX levels may also bee seen as a sign of investor complacency with a chance of getting caught off guard by a sudden change and building risks.
“The VIX is extremely low, but at the same time there are a lot of things on the negative side of the ledger that people should be concerned about, (but they don’t) seem to be focused on,” Greg Rutherford, CEO and co-founder of Cavalier Investments, told USA Today. “The only thing we have to fear is the lack of fear.”
For instance, Rutherford pointed to potential causes of concern, such as high price-to-earnings ratios, weak GDP, contractions in corporate earnings over four consecutive quarters, shaky world economy, pressure on oil prices and central banks reacting to weak growth.
However, markets remain complacent with no clear trigger point ahead to cause a spike in volatility.
The market “doesn’t see an event on the horizon that could cause the VIX (or fear) to spike,” John Canally, chief economic strategist at LPL Financial, told USA Today.
Hedge funds have pushed net short positions on VIX futures to the most since 2013, betting on higher equity prices, Bloomberg reports.
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VXX has also seen over $1 billion in net outflows over the past week, according to ETF.com, as investors turned more bullish on equities.
“VIX positioning went from incredibly bullish back in February, when the world was coming to an end, to shorts at all time lows,” Michael Purves, chief global strategist at Weeden & Co LP, told Bloomberg.
For more information on the CBOE Volatility Index, visit our VIX category.
ProShares VIX Short-Term Futures ETF