Stand at sea level and you can see about 8 miles.
That’s the horizon. Past it the water curves away and you’ve got nothing, no matter how hard you squint.
VIX measures 30 days out. So when somebody asks me where VIX is on a day the tape is getting kicked around, my answer is that VIX don’t work here no more. It’s over the horizon. It’s measuring something you can’t see from where you’re standing, and it’ll sit right there while the risk in front of your face does whatever it wants.
What Moves It
Correlation.
VIX wakes up when the market stops rotating and starts going down together. The semis go, AMD goes, the whole complex goes at once. That is the only thing that gets it off the floor.
Which makes rotation the thing holding everything up. Money comes out of big tech, lands in financials, the advance-decline line improves, and the index barely moves. You cannot have a horrendous sell-off unless the rotations stop. I don’t give two craps what anybody tells you about the level of any index. That’s the mechanism.
The Tell Nobody Watches
Pull up Caterpillar and put SMH next to it.
An industrial machinery company has been trading like a chip stock. Looks a little like Broadcom. Looks a little like Nvidia. Same shape, and you can barely tell them apart.
When that happens across enough names, correlation is building. Once it’s fully built the rotations stop, because there’s nowhere left to rotate to. VIX finally comes alive then, and by then you’re not getting a decent price on anything.
What To Do About It
Quit using VIX as your read on today.
If you want today’s risk, Cboe publishes a one-day version of the same calculation. Or skip the index and go watch whether the groups are moving together or taking turns. Taking turns is fine. Moving together is your warning.
And if you’re long into a market that’s taking turns while oil and rates do something ugly, put a hedge on. A hedge is just a Band-Aid. It is not a fix for a poor performing market over time. But a Band-Aid beats standing there bleeding while the risk in front of your face does whatever it wants.
Watching whether groups rotate or move together is one way in. Reading where the dealers are obligated before the bell is the other one, and it’s a lot more precise.
And that’s what Brandon and I covered last night in detail.
Click the link to see how it all works.
To your success,
Don Kaufman
