Is VIX done with its big move? Maybe not this time! The current set-up on the VIX trades (ETNs like UVXY and VXX as examples) appears to be longer term bullish for them, in my opinion. Continuously in the recent past few years, these ETNs will spike for a short period of time, and then pull back to new lows. However, that dynamic may be suspended for now, at least for a longer period of time than a quick spike and drop.
The ADX (50) graph has gone bullish with a wide spread for the first time in memory…and the pattern set-up is looking like a Bull Flag, which implies it could move higher yet, not lower.
Also, we must think about why the pattern has been so bearish the last many months? Yes, there is the rollover time degradation factor, and that is a powerful one! …but there has also been the phenomenon of contango in the futures of VIX where the up-front contracts were cheaper than the next month’s contracts and this caused a rollover devaluation as the underlying futures were rolled over into more expensive future months contracts each month before expiration.
Now, I would contend that the contango has given way to backwardation, meaning that as the up-front expiring futures contracts are rolled over, the next month’s contracts are cheaper to buy which limits expenses to the NAV of the ETN….If the NAV is receding at a slower pace, or even rising, then the short trade of UVXY becomes more problematic.
This brings up one more point, and not widely known among retail traders, but the Market Makers are required to maintain a stable price as close to the NAV as possible (there is something called the ETF stabilization rule which MMs must abide by per SEC rules)….and generally speaking, the MMs will rarely let the discount or premium to NAV vary by more than 10% on an ETN or ETF….although that is not always possible as witnessed during extreme moments like the Flash Crash morning of August 24th.
Still, that extreme moment lasted about an hour at best, and then the MMs got control of things and pulled prices back closer to the underlying NAV (Net Asset Value). My point is that if Vix futures are in backwardation, then the NAV of UVXY, VXX and other vixens is under less stress of price depreciation, thus rendering a consistent short strategy of VIXen ETNs as possibly a flawed strategy…for the time being, at least. In the long, long run, it’s likely not a failed strategy, but in the nearer term (next several weeks?), I think that can be a debatable point.
However, if one is positioned both long and short and prepared to take advantage of near term volatility, that seems like a sound strategy to me. With the FED making its intentions known by Thursday afternoon (September 17th), this could be a really good moment in time to assume both a long and short positon on the Vixens!