In our last Newsletter (Q1 2018) we ranted at length on the record breaking sleepiness of 49 times the VIX (Fear Gauge – low reading means no fear) had closed under 10 in the year 2017 after only closing below 10 a total of nine times prior to 2017 since the inception in 1990.
While we were warning of more normal times to come, money poured into a product that made money by a continued sleepy VIX or XIV.
We had no idea just how fast a return to normal would occur. Good timing or lucky, either way …. capital market returned to more NORMAL ways!
VIX versus the XIV
Just like in any other parts of life, fear goes up WAY faster than it goes down, or subsides.
Here is our chart, literally from our Newsletter – A very Sleepy VIX – fear gauge.
Looking back at the chart above one can easily see the VIX does not always sleep.
Fast forward to late January early February … the VIX awakened … like a sleeping giant, but not happy.
While we knew of Wall Street products that bet the VIX would remain asleep. We had no idea several billion dollars had found their way into these products.
We liken these money making, if sleepy VIX, products to picking up nickels in front of a steam roller … all good UNTIL!
Here’s what UNTIL looks like:
With several billion dollars (not any more) in these type of assets, when the VIX awakend and the opposite drop occurred, synthetic products became mandatory buyers and sellers of our fear index, the VIX … exaggerating capital market movement.
Just like in a traffic accident, this was not the only item that occurred, but this was another straw that helped awaken the sleeping giant!
- Earnings are good ….
- Consumers are happy ….
- Global recovery is finally happening …
Have a Great “Sleeping Giant” Day!
John A. Kvale CFA, CFP
Founder of J.K. Financial, Inc.
A Dallas Texas based fee only
Financial Planning Total Wealth