iPath S&P 500 VIX Short-Term Futures ETN (VXX)

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VXX Sends Up One Last Warning Sign for Bulls
By: Schaeffer's Investment Research | December 31, 2018

The rapidly maturing VXX could be signaling SPY underperformance for the year ahead

Just ahead of its January 2019 maturity date, VXX has embarked on a major technical breakout

The following is a reprint of the market commentary from the January 2019 edition of The Option Advisor, published on December 28. For more information, or to subscribe to The Option Advisor -- featuring 10 new option trades each month -- visit our online store.

"...while there have been a number of broad-market shocks in recent years that have carried VXX up to or above its longer-term, under-the-radar 320-day moving average -- including those in October 2014, January and September 2015, and January 2016 -- this latest VIX explosion didn't meet that bar. At its Feb. 9 intraday peak of $56.50, there was still plenty of daylight between VXX and its 320-day moving average.

"Given the relatively brief history of VXX... there aren't too many prior examples of the ETN rallying above its 200-day moving average but stopping short of its 320-day. In fact, there's exactly one we can find, and it occurred in early December 2015. Following that instance, VXX experienced a brief cooldown before spiking again...

"So... it might be fair to say there's still some fear left to be wrung out (and some more choppy trading ahead) before we return to a state of calm in the stock market."
-- Anatomy of a VXX Breakout, Chart of the Week, Feb. 19, 2018

"...2018 is unique in that VXX has never before been up more than 50% year-to-date through the end of February...

"Broadening the scope of our analysis beyond simple monthly returns, VXX is (as of this writing) ensconced in an unusually lengthy streak above its 160-day moving average. While VXX has yet to challenge its 320-day moving average during this 'Great Volatility Ramp of 2018,' the ETN has now notched more than 30 successive daily closes atop its 160-day trendline.

"...Stock market bulls, of course, will be hoping that this latest signal plays out like those in 2011 and 2016, and not like the 2015 signal that preceded notable SPY underperformance over every time frame."
-- What to Make of the Unprecedented VXX Action in 2018, The Option Advisor, March 23, 2018

"...[VXX] settled Thursday's session at $36.87, just a hair's breadth above its descending 320-day moving average at $36.84. The photo finish above this trendline, which previously contained the late-March/early April VXX incursion, directly preceded Friday morning's sharply lower open for VXX.

"...In the meantime, the 320-day moving average should prove to be a trendline worth watching, as a break by VXX above and away from this descending ceiling would be truly remarkable."
-- Crucial VXX Moving Average Jumps Back Into Play, Chart of the Week, Oct. 14, 2018

Per the excerpts above, we've been tracking the unusual, remarkable -- and in some cases, completely unprecedented -- action in the iPath S&P 500 VIX Short-Term Futures ETN (NYSEARCA:VXX) throughout 2018. So as we prepare to file our final commentary of the calendar year in this space, and as VXX approaches the Jan. 29, 2019 maturity date on which it will cease trading, it seems only fitting to discuss the implications of a rare, recent technical formation on VXX's daily chart.

As of Friday, Dec. 14, the exchange-traded note (ETN) -- which, as suggested by its name, is designed to track the action in short-term Cboe Volatility Index (VIX) futures -- completed a "golden cross," wherein its 50-day moving average rose above its 200-day moving average. This crossover, generally viewed as "confirming" a bullish price trend, has occurred only five previous times in VXX's not-quite 10 years of trading history -- and the instance earlier this month was the second of 2018, per the table below.



A "knee jerk" contrarian read on the VXX golden cross might be that it's a signal of fear and panic becoming overdone, and therefore a suggestion that a short-term (or long-term) bottom has been reached in the stock market. The graph below, which denotes VXX golden crosses as yellow dots alongside the SPDR S&P 500 ETF (SPY) price action since 2011, shows that has sometimes been the case -- but certainly not always. In particular, note on the graph below that a relative "cluster" of VXX golden crosses coincided with a period of choppy, sideways-to-bearish SPY trading during the period from early 2015 through early 2016.



In other words, a deeper dive here is required. This latest VXX golden cross, unlike the March 2018 occurrence, took place simultaneously with a convincing breakout by the ETN above its 320-day moving average -- a trendline that previously provided resistance, as noted in the accompanying excerpts. And yet, the current VXX ramp has yet to equal the magnitude of its first-quarter counterpart in terms of (a) producing any kind of a "climactic" share volume spike; and (b) generating an equivalent peak in the 20-day Relative Momentum Index (RMI), with the RMI level of 82 (as of this writing) falling about 10 points short of the mid-February high-water mark.



Taken in context with the rapid deterioration in the technical outlook for SPY itself, these "shortcomings" in the most recent VXX spike should give investors pause -- as should the table below, which summarizes average SPY returns following the five VXX golden cross instances detailed above, compared against the SPY's "at any time" returns for the same time frames.

While the small sample size is a worthy caveat, note that SPY's average one-year return following a VXX golden cross is 9.61%, with 75% of returns positive -- undershooting its average "anytime" one-year return since 2011 of 12.09%, with 90% positive returns. Further, SPY's standard deviation of returns in that post-golden cross year is 15.49%, pointing to higher-than-normal volatility relative to the 8.26% standard deviation logged in other 12-month time frames.



And to brace you just a bit further for the possibility of SPY underperformance in the 12 months ahead, consider also that those underwhelming post-VXX golden cross one-year SPY returns were all racked up during a decade-long bull market. If we're in the midst of transitioning into a bear market, the long-term SPY performance going forward could be considerably less impressive than even history would suggest.

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