“Strange Things Are Afoot In Vol World” – VIX’s NASDAQ Cousin Sends An Ominous Signal

By Simon White, Bloomberg Markets Live reporter and commentator

Sharp intra-day falls in the Nasdaq VIX, like those we’ve seen in recent days, have previously been associated with corrections in the Nasdaq 100 itself.

Strange things are afoot in vol world. S&P implied volatility as captured by the VIX has looked low relative to cross-asset volatility, at-the-money volatility and realized volatility for most of this year. This is unexpected given equities are in a protracted bear market. The relative cheapness of deep out-of-the-money puts is perhaps one explanation, as the market believes the Fed’s put is drawing nearer.

Nevertheless, we are also seeing similar patterns in the Nasdaq 100’s version of the VIX, the VXN. It is also very low compared to realized volatility, as well as being close to 15-year lows to at-the-money volatility.

On top of that, there has been some unusual price action in the VXN in recent days. There has been a cluster of lightning-fast intra-day falls, with an equally sharp rebound straight after. These types of moves are very rare, and they have never been this big, with the low hitting only 20% of the close.

This is potentially worrisome. Previous occasions where we have seen similar price action have often marked corrections in the Nasdaq.

Equity volatility across US indices looks ominously low, but this additional rare behavior in Nasdaq vol is worth paying attention to lest it indicate further equity-market instability.