Is the VIX Revealing Complacency?

Inverted VIX chart (lower graph) compared with Dow Jones Industrials shows the VIX approaching levels not seen since the May top.


Courtesy of Dick Arms

This makes  it increasingly less likely that we are approaching a bottom than a top; Note that the VIX can maintainthese levels for extended periods of time.

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  1. S commented on Sep 5

    I REALLY like using the VIX as a buy signal after large, abnormal spikes.

    But as you point out, since vol can stay low for long extended periods, it has very little value to me as a sell signal.

  2. Michael C. commented on Sep 5

    Even more interesting, per, if you chart the “volatility of the volatility”, then you get the lowest in 16 1/2 years.

    In other words, the VIX has not only been going down, but the range of the volatility index itself is at even more extreme levels.

    But hey…it looks like we’re still buying…

  3. Robert Coté commented on Sep 5

    Battipaglia on the Financial Entertainment Network 12:27 today just said that $6T of consumer obligation courtesy of the housing pustule (my word, he used the benign “bubble” word) needs to work through the economy. This is 2 years worth of family income. My take is $7T-$9T for reversion to the mean for housing values. People won’t have any money for stocks/retirement for a very long time. Any kind of economic downturn and asset liqudation just for living expenses wil be the factor forcing downward pressure.

  4. BDG123 commented on Sep 5

    The VIX can be “gamed” and can be useless at times. At other times it is great as a confirmation. There’s more than a few things at multi-year lows as it pertains to volatility.

    If this is a bottom, I’ll kiss your bottom. It would be the only bottom in modern history to have these characteristics. Btw, I really don’t want to kiss your bottom. Maybe if you paste a picture of Jessica Alba to it……….and wear a wig.

  5. Alaskan Pete commented on Sep 5

    BR: Props on the “tired bond rally” call.

    That chart threw me a bit at first since we normally see the VIX plotted in a non-inverted fashion. Maybe I should read first, instead of go “oooh! ooh! look at dee pretty pictures”

    Watch for this “major new oil discovery” to turn out to be much less than the hype. (See: Mexico’s latest find, e.g.). Deepwater production (this find is under 7k+ ft of water and another 15kft below the sea floor) is very operationally intensive and at that depth the production usually has a high gas:oil ration.

  6. RW commented on Sep 5

    AP, saw a comment at Oil Drum that the ‘major discovery’ was in a tertiary field with no pipeline so there is some question WRT economic feasibility.

  7. Robert Cote commented on Sep 5

    Understand that the Oil Drum has said and continues to say that absolutely, under no circumstances, with no caveats that there is/was no more major oil left to be discovered. Then came Cantrell II and now Jack. They are squirming because the peak oil theory has been irrefutably demolished for the 148th straight year. “Rock Oil” in Pennsylvania was originally considered a curiosity.

  8. Ryan commented on Sep 5

    The VIX has been falling but the Equity Put/Call Ratio has not. This shows that there is still fear in the market and the market still seems to be climbing that wall of fear for now. Investor intelligence is still not as optimistic as it should be at a top. I think we are about 3 weeks away from a top.

  9. BDG123 commented on Sep 5

    So, does that mean “peak oil” is still intact? Whew! Thank God. I was beginning to believe it was all bullsh*t. But then I came to my senses and realized Wall Street has never misled me or anyone else for that matter. Now I can rest easier at night.

  10. Chief Tomahawk commented on Sep 5

    BR, any commentary regarding FED open market purchases and the multiplier effect? Hasn’t the FED been overly reliant on this action ever since the ’87 crash? And what is the multiplier effect up to now: 100 times?

  11. Barry Ritholtz commented on Sep 5

    I am banning trolls and spammers with extreme prejudice.

    If you think you have been sucked into the deleting vortex by accident (posts deleted, or Email/name/IP address banned) send me an email explaining why you have been banned in error.

    New rule: no jackasses. That may raise the bar for some of those who were in a gray zone of trolldom . . .

  12. lld commented on Sep 5


    explain how VIX can be “gamed”

  13. BDG123 commented on Sep 5

    I’m not sure of how it is being utilized but intraday there are times when the $VIX will open up 5-10% when the futures market is also opening up then sell off throughout the day while the market rises. I’ve noticed this action over time at levels of support and resistance and it is happening again today.

    If anyone has insight into how or why I’d be interested.

  14. BDG123 commented on Sep 5

    Actually, let me clarify that before I head out the door. Today the $VIX will end up and the S&P will end up. That has happened alot in the market at certain points of time. I want to know what is happening underneath. How are the new $VIX instruments being used to possibly affect this if at all…………….Any feedback would be great.

  15. Vega commented on Sep 5

    VIX is the tail, not the dog. It’s level is a function of implied front and second month SPX vol. The SPX options pit is the deepest and most liquid options pit in the world. Sure, locals will game big orders and rolls, but it’s pretty hard to manipulate vol (the VIX) unless real supply / demand is moving the market.

    So changes in VIX reflect changes in SPX implied option vol. Generally speaking, vol comes in as markets move up, and vice versa. Price tends to slide down the SPX vol-by-strike curve as spot moves up and vice versa.

    Anyway, there are a lot of moving parts. But suffice it to say that the only way someone is gaming the VIX is if they are a massive buyer or seller and shift the SPX vol curve intraday. And I’d argue that’s not really gaming anything, but rather a real change in the supply / demand for vol.

    P.S. There’s a difference between shifting the curve and sliding up or down the curve, too. But…

  16. dryfly commented on Sep 5

    On oil & energy in general… the whole ‘peak oil’ phenom isn’t that oil or energy will run out completely, its that:

    (1) we will eventually hit a production peak, eventually

    (2) that peak will not only be determined by ‘physical inventory’ alone but more likely will be ‘price constrained’ before the physical inventory reaches peak.

    Meaning oil & energy in general won’t run out, CHEAP oil & energy will run out. The most recent finds if I understand it will be expensive to exploit. This is exactly what folks watching ‘peak oil’ expect… as prices soar, the reward to find new fields increases, new fields will be found, they will be increasingly expensive to exploit.

    This will ultimately put a damper on oil-sensitive consumption, whether you think that’s good or not.

    I really don’t see how the recent finds change much other than the hype.

    Energy will be there, just won’t be ‘too cheap to meter’ and that ‘price floor’ will continue to shift up as oil approaches ‘peak’.

  17. Alaskan Pete commented on Sep 5

    Cote: You cite “Cantarell II” (actually named Noxal-1)which is the field I referred to as being “much less than the hype”.

    Although the initial report of the find back in April was hyped to the hilt, including Pres. Fox running his gob to the international press…the estimated reserves and URR (ultimately recoverable reserves) was revised dramatically downward shortly thereafter. But, you never saw much in the mainstream press on the revision. Funny how that happens, huh?

    Here’s a snip on the revision via EnergyBulletin:

    “HOUSTON — Noxal-1, a deepwater Gulf of Mexico well trumpeted in March by Mexican President Vicente Fox as being a major oil discovery, appears to be a modest gas find.

    Speaking on Mar. 14 from the drilling rig in 935 m of water 63 miles off Coatzacoalcos, Fox said the then as-yet-untested well had the potential to produce 10 billion bbl of oil (OGJ, Apr. 17, 2006, p. 35).

    However, after the well operated by state-owned Petroleos Mexicanos reached a total depth of 4,000 m, the fourth interval tested has flowed 9 MMcfd of gas from a reserve estimated at 245 bcf, said IHS Energy, Houston. ”

    I suggest speaking to those in the industry before accepting any MSM stories as accurate, or even remotely factual. YMMV.

  18. Robert Cote commented on Sep 5

    “Cote: You cite “Cantarell II” [which has not matched the initial hype]…
    I suggest speaking to those in the industry before accepting any MSM stories as accurate, or even remotely factual.”

    Of course the Mexucan national oil company is lying. It doesn’t matter. What has honestly been discovered even at the extreme low end and discounted as well this year alone is already more than the peakinese have stated flat out, with no codiciles could EVER be expected to be newly discovered. The peakinese are just plain old flat out wrong again. The peak oil theory is broken but will not die. The peakinese depend on a constant new supply of the gulible. The US has extracted more oil since 1975 than was considered proven reserves at that time and has MORE proven reserves now. I’d like to have some enumerable criteria which will shut up these CLODs (chicken little oil depletionists). Fact is there’s nothing, no fact or arguement that will shut them up because it is a religion to them. Normally i wouldn’t care but their views are not harmless.

  19. BDG123 commented on Sep 5

    I understand your comments and how the VIX works but it still doesn’t explain the behavior. I’ve got a possible thesis but it’s too long and complicated to post. But, nonetheless, I’m quite confident the market can be manipulated in the short run. Whether you define it as manipulation I guess depends on your perspective.

  20. Allenm commented on Sep 5

    While you are quite reasonable in almost all of your blog comments, the oil depletion comments do seem to be out of line.

    The only question of oil is how long we continue to price it like morons. The morons being political actors who control most of the world’s production- and you know who they are. The best example I can possibly think of is the pricing in countries that produce it prodigiously- it is dirt cheap. Check out the pump prices in Venezuela, Indonesia (which has hit their easy production maximum!), S.A., Iran, etc. Do they want to feel rich and popular? You bet! So subsidies rule the day! Now, as the biggest energy hog on the planet in terms of energy consumed per person, complete with a significant amount of oil imported from the morons, maybe we should feel a little more vulnerable about our current lifestyle. I don’t yet have enough wealth to pay $10 a gallon gas without significant damage to my lifestyle, and I suspect most of the rest of the US is in the same boat.

    The transition to the next energy system is beginning, whether the rest of us like it or not- and oil and natural gas should not be burned for electricity or to make cheap fertilizer…oh wait fertilizer isn’t that cheap any more. Check out what your legislature in California have done to increase the costs of the current energy schema to combat global warming.

  21. RB commented on Sep 5

    It seems like the peak oil theory is similar to statements on limits of scaling transistors in Silicon processes. Everytime an ultimate limit is placed on how much you can scale transistor dimensions, the (massive) industry finds a way to scale further by working around the limiting factors. But it is getting harder and harder as the number of elements used in modern Silicon processes now spans the entire periodic table and traditional lithographic techniques becomes more and more limited. So, the modern storyline is that while scaling is not dead, the free lunch is gone. And so apparently with oil …

  22. JGarcia commented on Sep 5

    VIX / VXO is a much better buy signal than a sell signal.

    People also often forget, if you look at a long term chart of these volatility measures, the “high” readings of the late 90’s early ’00’s were an obvious abberation.

    Of course the same can be said of the dollar as well.

  23. whipsaw commented on Sep 5

    I would defer to Alaskan Pete’s views on this oil find thing, but it seems to me that drilling for oil at a depth of 7000 ft and then having to pass thru 20,000 feet of seabed and underlayment can’t be cheap. I would give them credit for doing it at all, but if the project’s viability is based on the premise that oil will remain in the upper $60 range, then I don’t see much relief from pricing, just some removal of foreign dependency one day.

    There are other areas where oil deposits are substantial but of little economic interest unless prices are high- like off of the west coast of Greenland. Or my personal belief is that there is a huge amount of oil in Antarctica (which is the main reason why there are 13 countries doing “scientific research” there), but serious exploration, extraction, and distribution will have to await much, much higher prices.

    Peak oil is viable as a concept and probably inescapable, but it’s hard to tell where we are right now given the political and economic manipulation that has characterized the oil industry and those associated with it for well over 100 years. I’d just say that it would not amaze me if the Saudi wells ran dry tomorrow, but it would surprise me if they were still pumping in 30 years.

  24. Robert Cote commented on Sep 5

    For some reason I am expected to defend the undeniable truth that the fundamental assumptions of the peak oil theory are wrong. How many times must peak oil be refuted before we are given respite?

    If oil goes to $150 we have 600-1000 years left. At $200/bbl geopetroleum is relegated to a marginal industrial resource like tin or guano. We cannot run out of the stuff as long as a market exists so any theory of peak is meaningless. We ran out of $10 oil in the 70s. Did we run out of oil?

    The price is the price. Right now if you offer $80/bbl you can control the entire world’s output. There is no moronic underpricing. This ain’t the Hunt brothers and silver either. Regardless, I do indeed live under the benevolent thumb of the formerly great State of Kalifornia. Current laws will certainly be looked back on by future generations with amusement. Single party politics is an ugly thing.

  25. whipsaw commented on Sep 5

    per Robert Cote:
    “For some reason I am expected to defend the undeniable truth that the fundamental assumptions of the peak oil theory are wrong. How many times must peak oil be refuted before we are given respite?”

    “Undeniable truth” is usually problematic, Robert. But perhaps we are talking about different things. My understanding of “peak oil” is that once a given field reaches 50% exhausted, whatever is left becomes progressively (perhaps geometrically) more difficult and expensive to extract. If that is applied to oil supplies as a whole, then when the world reaches (or perhaps reached) the 50% point, prices ramp up in a non-linear fashion, subject to the “discovery” of new deposits that provide some cushioning.

    Oil is in infinite supply in geological time, but very finite in 5-10 generation human time if demand is increasing exponentially. I don’t doubt that there are probably some very large deposits around that would be easy pickings if found, but most of those are already in production or are already heading towards exhaustion. Then there is probably a huge amount that is neither discovered nor economically extractable at current prices. But that doesn’t mean that the basic concept of peak oil is invalid, it’s just a timeframe thing.

    As far as the market goes, there has certainly been moronic underpricing for political reasons from time to time which is one of the reasons why OBL is so keen to overthrow the Saudi kingdom, among others- “gave away the oil to the infidels for baubles” yada yada yada. Oil is a lever and a weapon and is priced according to mercantilism rather than market forces much of the time, as is currency.

    I sold my January XLE calls at a loss today because I got tired of trying to figure it all out, so you can be pretty sure that oil prices will spike back up by 10% over the next few weeks. :) Or maybe not until after the first Tuesday in November, but it will happen.

  26. Robert Cote commented on Sep 5

    Whipsaw, there’s an understandable amount of confusion surrounding peak oil. This is deliberate because the peakinese are so very wrong on the facts they need wriggle rom. Often you’ll hear about US peak production being spot on per Hubbert in the 1950s. Well, starting in the 1950s and updated until about 1971 when the theory loooked into his far distant crystal ball and saw 1973-75. Peak Oil is only good if it can call a turn that can result in profit. For the last 148 years it has been wrong. Ever see a slots addict? They’ve lost so much they are “due?” See if these are familiar:

    * “Hurry, before this wonderful product is depleted from Nature’s laboratory!”
    –advertisement for “Kier’s Rock Oil,” 1855
    * “. . . the United States [has] enough petroleum to keep its kerosene lamps burning for only four years . . . ”
    –Pennsylvania State Geologist Wrigley, 1874
    * “. . . although an estimated two-thirds of our reserve is still in the ground, . . . the peak of [U.S.] production will soon be passed–possibly within three years.”
    –David White, Chief Geologist, USGS, 1919
    * ” . . . it is unsafe to rest in the assurance that plenty of petroleum
    will be found in the future merely because it has been in the past.”
    –L. Snider and B. Brooks, AAPG Bulletin, 1936

    The latest REAL measurements can be found at:

    Sick of oil out of the ground? Rapeseed, sunflower/safflower, algae, the
    list is long before we even start fiddling with the genes. We only use oil
    because it’s all over the place, cheap and easy. For instance, whale oil is
    really good for lubricating the chain on my motorcycle so that it doesn’t
    yank so much.

    To really go over the edge:

    Ever wonder why there is so little research given the current high prices? The reason oil companies use $15 to vet potential investement returns is not because they expect oil to be $15 but because they know the OPEC nations can make oil $15 any time they please. This is why alternative energy investment is likewise insensitive to the market priceof oil but instead responds the cheapest marginal production cost of traditional energy sources. As long as the threat of OPEC rendering your multibillion dollar investment worse than worthless remains you won’t see private investment.

    This is loosely related to the fatal flaw of “Peak Oil.” We ran out of $10 oil decades ago and appear to be running out of $20 sometime in the next decade. We have maybe 30 years left of $30 oil but we have an infinite supply of $90 oil because at $90 with no threat of being crushed by a cartel a lot of the things we use oil for are economical to do in other ways.

    I think you miss the point of my tedious repetion of the timeworn examples of Maltus, Erlich, Club of Rome Hubbert, et al. Point being; THEY’VE ALWAYS BEEN WRONG. And every time it was because of events/circumstances they never envisioned. Given 3 centuries of uniformly unbroken failure of the limits crowd it is a suckers bet to think they finally got this one right. My personal bets for their “I never thought of that” excuses are RTSC, amorphous solar, monopoles and Fullerenes. Physics has no limits. I met Buckminster Fuller once, second or third smartest man I’ve ever met. They just don’t operate on the same plane as we mere mortals. I’ve no doubt that were he around to comment on peak oil he’d recommend patience.

  27. dryfly commented on Sep 6

    Did we run out of oil?

    R Cote, your setting up a straw man. ‘Peak Oil’ never says we run out of oil, it says we run out of cheap oil. Big difference.

    ‘Peak’ means we hit a point where less oil is extracted from a source than the previous period even though they try to maintain or increase production. Not less in dollar amount but less in physical amount.

    We hit ‘peak’ in the 70s in the continental US. I believe we have hit it at Prudhoe too. If oil was a million dollars a bbl we couldn’t pump at a faster rate out of either field – it physically isn’t there.

    But that doesn’t mean we are out completely – at $70/bbl they are pumping like crazy in places like W Texas & Oklahoma trying to get oil out of depleted wells & succeeding, just not at production levels that were easily attainable pre-peak.

    Same thing will happen in Saudi someday, maybe happening now for all I know but doubt it.

    And the higher the price goes the farther out that peak is – I agree. But the biggest reason isn’t that they find more oil, or squeeze more oil out of older wells as much as higher prices force substitution & conservation so that demand falls back in line with supply – at a lower supply point stretching out what supply there is.

    I agree there is a lot of hype over peak oil – personally I think it will be a mixed curse, mixed blessing when energy gets way more expensive. It will correct some of the worst abuses of globalization FAR better than tariffs or WTO sanctions ever could.

    But the fact there is a limited resources is real – the timing of its use & rate of depletion depends to a great extent on market forces.

  28. Barry Ritholtz commented on Sep 6

    I mentioned the Oil find early in the AM;

    I was surprised how much excitement 6000 barrels a day 10 years from now has generated . . .

  29. wunsacon commented on Sep 6

    Robert Coté, it seems to me that you implicitly accept Peak Oil theory and just keep criticizing a theory by the same name that refers to “oil running out completely”.

    >> If oil goes to $150 we have 600-1000 years left.

    This statement means you already understand that higher prices lead to lower demand. Isn’t that lower production? (Lower production raised the price and, in turn, lowered demand. But, even if somehow the causality were reversed, production is lower. Peak oil has been passed.)

    >> At $200/bbl geopetroleum is relegated to a marginal industrial resource like tin or guano. We cannot run out of the stuff as long as a market exists so any theory of peak is meaningless.

    The Peak Oil crew agrees with you. The Peak Oil theory presumes that not all oil will be pumped out of the ground. Why not? Because, at some point where oil is too scarce and becomes absurdly expensive, civilization will standardize on another fuel (or, say, telecommute, change lifestyle, whatever).

    >> We ran out of $10 oil in the 70s. Did we run out of oil?

    Political supply constraints — oil embargo — are not geophysical and economic constraints. Therefore, our experience during the 70’s is not a knock against Peak Oil theory.

    I’m pretty sure you know this. So, why use it to criticize Peak Oil?

    >> [[you cite a bunch of people who miscalculated when peak would occur]]

    Were 16th century chemists right about everything? The bad news from scientists of a prior century should not be used to discredit the bad news from contemporary scientists. That methodology for tossing out bad news is like thinking that “stocks went up before despite warnings; so, they’ll continue to rise despite new warnings.”

    >> I think you miss the point of my tedious repetion of the timeworn examples of Maltus, Erlich, Club of Rome Hubbert, et al. Point being; THEY’VE ALWAYS BEEN WRONG.

    No, Hubbert was right. He called a peak in US production at around 1970. Even the later large discoveries in Alaska (and in Mexico — which is not America and which he was not trying to calculate) did not boost US production beyond what was reached around 1970.

    Now, the question is: when will global production peak? Waypoints to understanding that include questions about whether the Saudis have as much oil as they say they have.

    Also, although I’m sure you know this, other folks might not know that oil co’s know of more oil than they’ve booked as reserves. If the price of oil on Dec 31, 2006 is higher than it was a year earlier, oil co’s will report higher reserves than a year earlier. Did they find more oil? No. The increase in reserves just means that more of their oil was recoverable/profitable at present prices. Conversely, if oil prices go down, you’ll see reserve *losses*.

    Barry Ritholtz, I’m not sure but suspect additional wells will be drilled into the same field to increase daily production.

    Sorry if I read both your posts too literally.

  30. diva commented on Sep 7

    Robert Cote – you are 110% correct. We (little) people on this (big) planet will not run out of oil.

    The only reason for the increase in the POO (price of oil) during the 70’s was entirely due to the inflation caused by poor monetary management of the $ in the 60’s/70’s.
    That was the ONLY reason.
    Today is a bit more complicated…… but, still basically reflects poor monetary management of the $.
    There is plenty of oil.
    However, due to poor monetary policy…… WE all get to pay a premium at the pump for some years.
    Total stupidity.
    If more folks understood what was really going on…. we would all put a stop to it.
    However, most folks don’t understand……. so WE all get to ‘pay a price’.
    I continue to watch all this with disgusted bemusement.
    oh well

  31. rick commented on Sep 7

    people do have a choice…. in order to
    stick up their noses at monetary policy,
    they could dump bonds and use gold as currency.

    Obviously, majority have faith in the US monetary policy.

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