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Is the VIX Being Manipulated?

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A conspicuous rise in the CBOE VIX last Wednesday has reignited a long-standing debate over the soundness of the Wall Street fear index. Now, traders are asking whether the VIX is just plain broken or being gamed by holders of derivatives.

VIX Spikes

The CBOE Volatility Index measures how much traders are willing to pay for options that are used to hedge against future stock-market declines. The so-called “fear index” normally trades inversely with the S&P 500 Index, which means it rises when stocks fall or vice versa.

On Apr. 18, the VIX spiked 12% in the first 30 minutes of trading, marking the biggest move since 2010, according to data gathered by Macro Risk Advisors and The Wall Street Journal.

The following chart, courtesy of WSJ, illustrates the dramatic surge between 9:00 a.m. and 9:30 a.m. The only comparable move after the opening bell occurred on Feb. 14, when the index dropped nearly 14%.

Since the VIX cannot be traded outright, investors use VIX-linked products to trade volatility, including options, futures and exchange-traded notes. VIX futures normally trade in a state known as contango, where the futures price is above the cash price and later contracts are incrementally more expensive than earlier ones.

An illustration of the structure of VIX futures contracts is presented below based on Friday’s closing prices. Contango is observed for the first six futures months.

Concerns Over Manipulation

While VIX’s sudden spike was supposedly tied to large orders for S&P 500 put options, concerns over market manipulation have been on the front burner for some time. Since February alone, at least nine lawsuits have been filed by plaintiffs arguing that the VIX is being gamed.

CBOE President Chris Concannon, who recently testified before Congress over cryptocurrency regulation, has said the allegations have impacted the monthly auctions process. He also said that CBOE is boosting its technical infrastructure to resolve these long-standing issues.

Concerns over CBOE’s options settlement process emerged last December after the exchange fined a trading firm over allegations of improper bids related to volatility auctions. The markets in question were tied to both stocks and oil. For its part, CBOE has denied that manipulation exists, with exchange officials arguing that the VIX settlement process offers a transparent auction.

Analysts warn that the VIX, while growing in popularity, is dominated by speculators betting large sums of money on how chaotic stock prices will be 30 days from now.

Volatility returned with a vengeance in early January and hasn’t left the market ever since. The fear index spiked so heavily in February that products shorting volatility were put out of commission. Credit Suisse pulled the plug on XIV,  a popular inverse volatility product, on Feb. 20 after assets under management plunged from nearly $1.9 billion to $110 million in just six days.

Prior to the decline, XIV had performed extremely well during the bull market, with gains accelerating thanks to Donald Trump’s election.

Featured image courtesy of Shutterstock.

 

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4.6 stars on average, based on 649 rated postsSam Bourgi is Chief Editor to Hacked.com, where he leads content development for one of the world's foremost cryptocurrency resources. Over the past eight years Sam has authored more than 10,000 articles and over 40 whitepapers in the fields of labor market economics, emerging technologies, cryptocurrency and traditional finance. Sam's work has been featured in and cited by some of the world's leading newscasts, including Barron's, CBOE and Forbes. Contact: sam@hacked.com Twitter: @hsbourgi




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Market Overview

Market Update: U.S. Stocks Fall Again on Geopolitics, Global Growth Woes; Bakkt Announcement Fails to Inspire Crypto Rally

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U.S. stocks followed their European and Asian counterparts lower on Tuesday, as geopolitical tensions and concerns over global growth dampened investors’ sentiment. Crypto markets were little changed after Intercontinental Exchange (ICE) set a date for the launch of its new digital currency platform.

Stock Selloff Deepens

Wall Street opened with heavy losses following a tumultuous pre-market that saw Dow Jones futures plunge by more than 400 points. By the end of the day, all major U.S. indexes were well off session lows.

The large-cap S&P 500 Index closed down 0.6% at 2,740.69. Eight of 11 primary sectors finished lower, with energy shares plunging 2.5% as a whole. Industrials, materials and financials also experienced heavy losses.

Dow industrials fell 125.98 points, or 0.5%, to finish at 25,191.43. Caterpillar Inc. (CAT) and 3M Co (MMM) were the biggest decliners after announcing negative earnings guidance this year and next.

Meanwhile, the technology-focused Nasdaq Composite Index fell 0.4% to 7,437.54.

The CBOE Volatility Index, also known as the VIX, reached a session high of 24.66 on Tuesday. It would later settle at 20.97 for a gain of 6.9%.

Earnings Optimism Fades

Despite starting off on a solid note, third-quarter earnings season has produced mixed results for Wall Street’s big firms. Companies that missed the mark on their top and bottom lines have faced heavy selling pressure despite strong performances in other sectors.

On Tuesday, Dow blue-chip 3M lowered its earnings outlook for 2018 while Caterpillar acknowledged it will have to raise prices for most of its machines next year. Both companies are facing the burden of President Trump’s tariff war and what appears to be a protracted slowdown in China.

The Chinese economy expanded 6.5% annually in the third quarter, the weakest since 2009. The U.S. economy is projected to grow 3.9% annually between July and September, according to the Atlanta Fed’s GDP tracker. Economists at the Commerce Department will produce their first batch of Q3 GDP numbers on Friday.

Cryptos Extend Dismal Performance

Digital currencies failed to rally on Tuesday after Intercontinental Exchange announced a date for its new cryptocurrency platform. The global exchange operator announced Monday it will begin settling physical bitcoin futures contracts on Dec. 13. Bakkt, the platform that will facilitate the transactions, has been touted as a potential game changer for luring large sums of institutional capital to the crypto arena.

The cryptocurrency market cap reached a low of $207.6 billion on Tuesday, and was last seen hovering around $209.4 billion. Majors like bitcoin, Ethereum and Litecoin saw little movement compared with 24 hours ago. Meanwhile, XRP fell 1.3%. Bitcoin cash and Cardano and Tron were also down slightly.

Low-volume trading continues to impede on the market’s recovery. On Tuesday, volume across all virtual currency exchanges reached $10.4 billion, according to CoinMarketCap.

Disclaimer: The author owns bitcoin, Ethereum and other cryptocurrencies. He holds investment positions in the coins, but does not engage in short-term or day-trading.

Featured image courtesy of Shutterstock.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.6 stars on average, based on 649 rated postsSam Bourgi is Chief Editor to Hacked.com, where he leads content development for one of the world's foremost cryptocurrency resources. Over the past eight years Sam has authored more than 10,000 articles and over 40 whitepapers in the fields of labor market economics, emerging technologies, cryptocurrency and traditional finance. Sam's work has been featured in and cited by some of the world's leading newscasts, including Barron's, CBOE and Forbes. Contact: sam@hacked.com Twitter: @hsbourgi




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Market Overview

The Easy Way In

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Hi Everyone

It’s quite natural to think that the news influences markets but in many cases, it simply isn’t true. People move markets.

In traditional markets, we see often how an announcement regarding employment or inflation, or an interest rate decision from a central bank can have a huge impact on prices.

This is mainly due to the vast number of investors who are anticipating these type of events and are ready to deploy a large amount of capital at the drop of a hat.

In crypto, we simply don’t have that just yet. You’d think that news of half a dozen major financial institutions will be opening new options for cryptotrading and cryptoasset solutions would have an effect on prices but they’ve so far remained stable.

So it’s not surprising that LibertyX and Genmega are about to convert 100,000 ATM machines across the USA into user-friendly bitcoin vending machines has had no impact on the price of bitcoin.

What this does do though is builds the infrastructure that will be necessary for mass adoption, so that when people do decide to buy, they’ll have an easy way in.

@MatiGreenspan
eToro, Senior Market Analyst

Today’s Highlights

  • Asia Rally Over
  • Flight to Safety
  • Crypto Correlation

Please note: All data, figures & graphs are valid as of October 23rd. All trading carries risk. Only risk capital you can afford to lose.

Traditional Markets

Looks like Monday’s massive rally in Asia has been short-lived. By the time the bell rang on Wall Street, the mood had already turned sour and stocks across the board ended up down.

The only exception, oddly enough, was the Faang stocks, which managed to hold up the Nasdaq. As we discussed in yesterday’s update investors are looking to invest, but cautiously. Well, it looks like they found their refuge in the top tier brands.

The exception we can notice above is Netflix which dropped with the rest of the market. Also, it’s worth noting that even the Nasdaq futures are down this morning and the entire market threatens to break lower.

Here we can see the S&P500, which is sitting firmly below its 200 day moving average (blue line).

Perhaps the light at the end of the tunnel here is the upcoming earnings reports that will be closely watched by investment managers.

Flight to Safety

As the stocks turn red, we can see some clear signs that the other markets are looking for some safety. Turkish President Erdogan isn’t helping much either with strong accusations against the Saudi government over the Khashoggi incident.

Some are buying bonds as a way to lower the risk. As well the Japanese Yen is up sharply due to its status as a safe haven currency. This graph shows the greenback bowing to the Yen (this morning in the purple circle).

Of course, the most vulnerable at the moment are the emerging markets currencies, which are performing particularly poorly today.

Another clear sign of safe haven trading is the fact that gold has broken out to the upside making significant stretch into fresh highs and now trading at the highest levels since July.

Crypto Follow?

Though we’ve pointed out recently that crypto assets bear only a very small correlation with the stock market, they still are considered to be a high risk asset.

We have seen several times before where fear in the stocks has managed to spill over into the crypto markets and that might just be what’s happening at the moment.

The declines in crypto are very light today. This could be because, as we mentioned above, the tech sector seems to be mostly shielded from the current sell-off. In any case, there’s no denying that bitcoin and the Nasdaq are moving in tandem today.

Wishing you an excellent day ahead!

This content is provided for information and educational purposes only and should not be considered to be investment advice or recommendation.

The outlook presented is a personal opinion of the analyst and does not represent an official position of eToro.

Past performance is not an indication of future results. All trading involves risk; only risk capital you are prepared to lose.

Cryptocurrencies can widely fluctuate in prices and are not appropriate for all investors. Trading cryptocurrencies is not supervised by any EU regulatory framework.

Best regards,
Mati Greenspan
Senior Market Analyst

Connect with me on….

eToro: @MatiGreenspan | Twitter: @MatiGreenspan | LinkedIn: MatiGreenspan | Facebook:MatiGreenspan

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.6 stars on average, based on 133 rated postsSenior Market Analyst at Etoro.com.




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Analysis

Pre-Market Analysis and Chartbook: Stocks Plunge as Chinese Rally Fades

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Tuesday Market Snapshot

Asset Current Value Daily Change
S&P 500 2,713 -1.59%
DAX 30 11,282 -2.06%
WTI Crude Oil 67.72 -2.11%
GOLD 1,241 1.38%
Bitcoin 6,393 -0.20%
EUR/USD 1.1469 0.05%

The major global stock indices are all significantly lower today just after the US open, with several European benchmarks hitting new multi-month and multi-year lows after the recent bounce. Chinese stocks turned south after the strongest two-day rally in years, and although the local markets remain above their recent bear market lows, the shift weighed heavily on sentiment across the globe, with the Nikkei also getting below last week’s minimum level.

DAX 30 Index CFD, 4-Hour Chart Analysis

In Europe, the DAX is the weakest major index again, and German stocks confirmed the long-term breakdown that we have been following in recent weeks. Today, chemical giant Bayer is pushing the benchmark lower, but the weakness in auto-makers also continues to drag equities lower together with the struggling financial sector.

Spreads between Italian and core Eurozone government bonds are still wide, as the budget debate continues to pressure Italian assets, and despite the relative stability of the Euro, European equities are in deep trouble.

EUR/USD, 4-Hour Chart Analysis

The Euro is hanging on a thread above its monthly lows against the US Dollar, while the broader Dollar index hit a marginal new 2-month high today. All eyes are on the European Central Bank and Italy this week, and with the US midterms approaching, things can get wild in currencies in the coming days, especially given the rising volatility in equities, and the general risk-off shift.

While the EUR/USD pair is trading below the 1.15 level, the Dollar failed to show momentum against the common currency with buyers consistently stepping in near 1.1440. That said, the broader downtrend is clearly intact, and a test of the support zone near 1.13 still seems like the most likely scenario in the coming weeks.

S&P 500 Hits New Correction Lows as VIX Eyes 25 Level

S&P 500 Futures, 4-Hour Chart Analysis

US index futures had an ugly overnight session before the pre-market earnings dump, with the Asian selloff dragging the major indices lower. While the Nasdaq is holding up above its recent lows, the Dow and the S&P 500 plunged well below their multi-month lows, and the small-cap Russell 2000 also opened deep in the red, below its correction low as well.

Short-term technicals continue to scream sell in the US, with the weak bounce clearing the bulk of the oversold momentum readings with regards to the key benchmarks, and with market internals still being very negative. For now, we would still not buy the dip here, especially as we see no major positive divergences in global markets either.

VIX (US Volatility Index), 4-Hour Chart Analysis

Looking at the Volatility Index (VIX), the regime change that we were speculation on at the start of the correction seems to be confirmed, with the VIX getting back very easily above the line-in-the-sand 20 level. The index neared the 25 level pre-market, and although the panicky 30 level is still well above the current zone, a concerted move below the lows could spark a renewed surge in the VIX as early as today.

This leaves a protracted correction as the best-case scenario for US stocks, but as usual with bearish trends, violent counter-trend rallies are expected along the way, punishing late shorts and resetting the negative sentiment.

ChartBook

Major Stock Indices

Nasdaq 100 Futures, 4-Hour Chart Analysis

Dow 30 Futures, 4-Hour Chart Analysis

FTSE 100 Index CFD, 4-Hour Chart Analysis

EuroStoxx50 Index CFD, 4-Hour Chart Analysis

Nikkei 225 Futures, 4-Hour Chart Analysis

Shanghai Composite Index CFD, 4-Hour Chart Analysis

EEM (Emerging Markets ETF), 4-Hour Chart Analysis

Forex

USD/JPY, 4-Hour Chart Analysis

GBP/USD, 4-Hour Chart Analysis

EUR/GBP, 4-Hour Chart Analysis

AUD/USD, 4-Hour Chart Analysis

Commodities

WTI Crude Oil, 4-Hour Chart Analysis

Gold Futures, 4-Hour Chart Analysis

Copper Futures, 4-Hour Chart Analysis

Featured image from Shutterstock

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.6 stars on average, based on 381 rated postsTrader and financial analyst, with 10 years of experience in the field. An expert in technical analysis and risk management, but also an avid practitioner of value investment and passive strategies, with a passion towards anything that is connected to the market.




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