Why I Am Betting on a Big Spike in the VIX
Traders are too bullish.
Seriously.
I typically start this report by saying that “permabears always say everyone's bullish.”
They're wrong 99% of the time.
Today is that 1% of the time when they're right.
Let's go through our 5 sentiment indicators so you can see the numbers behind my reasoning.
(click here for a primer on the 5 sentiment indicators below)
1) VIX Spread – Bullish
The VIX hit 9.39 early Friday, putting it awfully close to the 9.37 generational low set back on June 9.
That puts the 3-month spread up to 4.57, which means traders have very little fear of volatility.
This is up from last week's 4.0 reading, and qualifies as extremely bullish.
(click here for a primer on the VIX spread)
2) CNN Fear & Greed Index – Bullish
The Fear & Greed Index is at 76, up from 51 last week.
The F&G Index operates on a 1-100 scale, and a reading of 76 qualifies as fairly greedy. This indicator has been subdued as of late, so I was a bit surprised to see it this high.
3) AAII Sentiment – Bullish
The latest AAII Sentiment Survey shows that 35.5% of individual investors are bullish, up substantially from 28.2% last week.
This 35.5% reading is basically inline with the 38.5% long-term average, and indicates that individual investors are basically neutral.
This has been the case all year, even though the major indices have been hitting new all-time highs fairly regularly.
4) CBOE Equity Put-Call – Bullish
The CBOE Equity-Put Call ratio was at 0.53 yesterday, which is a very bullish reading
The 3-day moving average is 0.57, which is well below the long-term average.
These numbers indicate that traders are very, very bullish.
5) ISE Sentiment – Bullish
The ISE Sentiment Index is at 138 (meaning 138 calls bought for every 100 puts. The 10 day moving average is 105 (105 calls for every 100 puts)
Now that 10-day moving average of 105 is technically neutral, I'll count it as bullish because it's been subdued for so long.
The year-to-date average is just 87, so a 10-day moving average of 105 is a big change in trend.
Conclusion
Out of 5 sentiment indicators, we have:
- 4 bullish (up from 1 last week)
- 1 neutral (down from 3
- 0 bearish (down from 1)
I troll the bears constantly for spreading the outright lie that everyone's too bullish.
But again, today, the bears are 100% correct.
It's not 1999 all over again, but still — traders are extraordinarily bullish, which can sometimes (but not always) mark a top.
Remember, using sentiment indicators to time the market is often a fool's game.
But it's not often that we see so many sentiment indicators pointing in the exact same direction.
There is almost no fear and no volatility out there… which means we could be about to see a spike in fear and volatility.
Now, let's be clear: I am talking my book, and I freely admit that my positioning could impact my viewpoint.
Earlier this week, I went long VIX call and I own VIX bull put spreads.
I am speculating on a market decline that would spike the VIX, preferably over 17 within the next few weeks. And I may even add some SPY or QQQ puts.
As we all know, the theme this year has been:
- Equities steadily grinding higher
- Volatility near zero
- Sentiment leaning mostly neutral
I think things are about to change.