Despite It All, VXX At New Lows

“A nice blend of prediction and surprise seem to be at the heart of the best art.” - Wendy Carlos

The action of the 1 month VIX ETN (VXX) was quite telling last week in the face of “disappointment” over the European Central Bank’s decision to not explicitly announce new policy measures. I’ve noted numerous times before that the negative narrative is too well known to play out the way everyone thinks, and have been persistently bullish in the face of bearish rhetoric and behavior by investors and the media. Price dictates all, and as such one has to begin to reconcile the end of the world belief with the actual S&P 500 (IVV), which as of writing is up nearly 13% year to date.

So here we are with continuous reminders by Super Ben and the League of Extraordinary Bankers that they will step in should conditions warrant. Central bank paranoia over a 2008 repeat means that policy makers ultimately will do whatever it takes to prevent another systemic collapse like what happened post-Lehman. Because of that desire to prevent event risk, the 1 month VIX is at new lows as time premium erodes the exchange traded note (see blow).

What was most telling about last week was that despite the panic in global markets on Thursday following Draghi’s speech, VXX intraday fell to new lows while stocks themselves were declining. That divergence means that money was selling insurance against an event because of belief that central banks will prevent one.

This coincided with bond yields rising, in what appears to be the early stages of a meaningful crack in the bond market. The implication? If central banks have successfully removed the perception of the event from investor minds, the memory of 2008 will fade, and risk-taking likely returns once again to investor psyche. Put simply, as I said on Bloomberg prevent the event, and rally on in stocks.

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