Is The Vix Volcano Eruption Over?

Author

Don Kaufman
August 06, 2024

First off, let’s talk about this bounce…

Sure, it feels good to see some green after a sea of red, but don't get too comfortable. This rebound is nothing more than the market catching its breath after a sprint downhill. We're talking about heavily oversold conditions here, folks.

It's like watching a rubber band snap back after being stretched to its limit.

Now, about that volatility collapse.

Yes, the VIX has taken a nosedive today, but here's the thing - VIX and VVIX often overshoot to the upside like a rocket breaking the sound barrier.

When they come back down, it's not a gentle descent. It's more like watching Wile E. Coyote realize he's run off a cliff. The drop is fast and furious, but it doesn't mean we're out of the woods.

What happened yesterday to the VIX is very serious.

In the entire history of the VIX, there have only been 8 other periods where we've seen closures above 35.3. Let that sink in.

We're in rarefied air here.

Let me break it down for you:

  • 1990-1991 (4 instances): Iraq invading Kuwait, Gulf War I.

  • 1997-1998 (36 instances): Russian and Asian currency crises, collapse of Long Term Capital Management.

  • 2001-2002 (52 instances): 9/11, lead-up to Gulf War II, brutal bear market.

  • 2008-2010 (157 instances): The Global Financial Crisis.

  • 2011 (30 instances): Greek Debt Crisis shaking the EU.

  • 2015 (2 instances): August flash crash from China's yuan devaluation.

  • 2018 (2 instances): Growth scares from an overly hawkish Fed.

  • 2020-2021 (50 instances): The pandemic and its aftermath.

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And here’s the thing…

In most of these cases, risk didn't just disappear overnight. We're potentially looking at weeks, if not months, of heightened volatility.

So how should you be playing this?

First off, don't get lulled into a false sense of security by this relief rally. It's like being in the eye of a hurricane - things might seem calm, but there's potentially more turbulence ahead.

It's time to think defense.

Risk reduction should be at the top of your playbook right now.

Remember, sometimes the best trade is the one you don't make. Cash is a position too, and it might just be your best friend in the coming weeks.

As for a tradable low?

Don't hold your breath. We're likely weeks, if not months, away from seeing anything resembling solid ground.

To your success,

Don Kaufman