BY Dow Jones & Company, Inc. — 1:33 PM ET 12/02/2014
A consensus is building that recently wild swings across commodity markets will usher in anxious stock trading in the weeks ahead.
The CBOE Volatility Index has been pinned below its long-term average almost without exception since the start of 2013. It crested above 14 on Monday for the first time in a month before retreating 7% to 13.29 on Tuesday. It remains well below is long-term average of 20.
Yet some are looking for more volatility in the U.S. stock market with crude and gold prices flailing. Falling crude has also been hammering currencies heavily dependent on oil exports, such as Russia's ruble. This witches' brew of interconnectedness is likely to conjure up higher volatility readings in U.S. stocks, says Micheal Purves, head of equity derivatives research at brokerage Weeden & Co.:
"Crude oil volatility has made a series of steadily higher lows since the extreme lows in early July, and has recently spiked to three year highs. These dramatically lower crude prices magnify the divergence in macro economic conditions across several countries which in turn should enhance FX volatility. All of which should help nudging the VIX to a higher floor. Realized volatility too is starting to pick up.
"We urge caution here and think the VIX may well edge into a higher range in the coming weeks."
The so-called VIX is an options-based metric of how much investors are willing to pay for insurance on the S&P 500 index over the next month. The VIX tends to top when stocks fall, and vice versa.
MKM Partners' head derivatives strategist, Jim Strugger, is out with a report on Tuesday titled," Higher Volatility on the Horizon."
"Elevated volatility across other asset classes, particularly the spike in commodities, suggest it's time to shift moderately down the risk curve," he writes, meaning that "with investors under-protected, we like adding [defensive options] positions in January expiry to cover the period of vulnerability ahead."
Popularity of buying and selling exchange-traded funds and notes that track VIX futures have exploded in recent years. Recently, most investors have been pouring into complex products such as the ProShares Short VIX Short-Term Futures ETF ( SVXY) and the VelocityShares Daily Inverse VIX Short-Term exchange-traded note ( XIV), which are leveraged bets that volatility will be low muted. The XIV grew so fast in October that it became the largest VIX-related ETF on the market. A sudden uptick in volatility could majorly upset what has been a seemingly invincible trade in recent years.
Look for traders to pile the other way into products designed to rise with volatility, such as the iPath S&P 500 VIX Short-Term Futures ETN ( VXX) , ProShares Ultra VIX Short- Term Futures ETF ( UVXY) and VelocityShares Daily 2x VIX Short Term ETN (TVIX
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) . Already, VXX has taken in more than $200 million since the start of November, according to ETF.com.
