[Update: With stocks down sharply in early trading the CBOE Volatility Index (VIX) gained as much as 12% peaking at 15.65. This piece was originally run on Thursday, April 4th. ]
The S&P 500 lost 1% Wednesday, and judging by the 11% gain in the CBOE Volatility Index (^VIX), traders think there's more to go on the downside. Then again based on VIX buyers' record over the last few months, the spike in fear might mean it's time to get on the other side of the trade.
Ryan Detrick, senior technical strategist at Schaeffer's Investment Research, says traders have been jumping into the VIX for months with disappointing results. "We've seen consistent open interest records in the VIX really every month since last year," he says. Despite all this buying, volatility has fallen more than 20% in 2013 while the S&P has gained almost 10%.
At yesterday's close of 14.21, volatility seems like a sign of complacency but history says otherwise. "If you look back in the '90s, for almost 6 years the VIX consistently was beneath 20; then you look back to last decade, for almost 4 years the VIX was beneath 20." Detrick thinks another extended slump in volatility could be in the cards.
The S&P 500 VIX Short Term Futures ETF (VXX) is down more than 90% since inception yet Detrick still sees massive inflows as everyone on earth insists on calling a top in the market and a bottom on volatility. As Detrick says in the attached clip, when the masses are leaning in one way it's usually a good idea to take the other side of the trade.
At some point the rally will end and volatility will rise in a sustainable way. Based on the number of traders who keep getting fleeced betting they can time this sell-off, the way to play it may be taking some profits on the stocks you own now rather than getting long on the VIX.