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VIX plunge, options volume, steepening yield curve, oil’s recovery

Summary:
By Troy February 4, 2021 VIX plunge Last week I looked at the possibility of a VIX spike. VIX is now falling quickly after a sharp spike: When VIX fell more than -30% over a 3 day historical period, the S&P 500 was almost always higher 6-12 months later, although this could first lead to more short term volatility in the stock market: Options Last week’s volatility wrung a little bit of the speculative juices out of the market. A 1 month average of IWM (Russell 2000 ETF) calls – puts volume has fallen to the lowest level in a decade: even lower than during the March 2020 stock market crash. Over the past 10 years this was a bullish factor for the Russell 2000 over the next 3 months: And it

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VIX plunge

Last week I looked at the possibility of a VIX spike. VIX is now falling quickly after a sharp spike:

VIX plunge, options volume, steepening yield curve, oil’s recovery

When VIX fell more than -30% over a 3 day historical period, the S&P 500 was almost always higher 6-12 months later, although this could first lead to more short term volatility in the stock market:

VIX plunge, options volume, steepening yield curve, oil’s recovery

Options

Last week’s volatility wrung a little bit of the speculative juices out of the market. A 1 month average of IWM (Russell 2000 ETF) calls – puts volume has fallen to the lowest level in a decade: even lower than during the March 2020 stock market crash.

VIX plunge, options volume, steepening yield curve, oil’s recovery

Over the past 10 years this was a bullish factor for the Russell 2000 over the next 3 months:

VIX plunge, options volume, steepening yield curve, oil’s recovery

And it was a bullish factor for the S&P 500:

VIX plunge, options volume, steepening yield curve, oil’s recovery

Steepening yield curve

The yield curve is steepening after inverting in 2019. Commodities around the world are trending higher on a global re-flation theme.

VIX plunge, options volume, steepening yield curve, oil’s recovery

Historically, a steepening yield curve after a yield curve inversion was bullish for gold over the next 6 months:

VIX plunge, options volume, steepening yield curve, oil’s recovery

Oil’s recovery

Oil has broken above its 200 week moving average for the first time since last March’s plunge:

VIX plunge, options volume, steepening yield curve, oil’s recovery

When oil broke above such key long term resistance in the past, it usually pushed a little higher over the next month:

VIX plunge, options volume, steepening yield curve, oil’s recovery

Conclusion

  1. Short term trend followers should continue to ride the bull trend because no one knows exactly when it will end.
  2. Medium term traders should go neither long nor short.
  3. Long term investors should be highly defensive right now. This speculative bull market may last another 6 months or even 9 months, but in 2 years time, long term investors will be glad they did not buy today.
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