The SP500 has already gained back half of the Covid Crash. But thus far the total open interest in VIX futures is still at a very low level, indicating that traders are not yet interested in speculating there.
VIX futures did not even begin trading until 2004, and during the first few years there was not much interest in these new trading instruments. That began to change beginning in 2012, when open interest finally climbed up above 200,000 contracts. So that is where I begin our look at this week’s chart, showing the VIX futures open interest data compared to the SP500.
The first interesting point about these open interest data is that they tend to move up and down with stock prices. So a high reading for VIX open interest can be an interesting marker of a price top. The problem there is in identifying what “high” means for these data.
Low readings are a bit easier to spot during the time period shown in this chart. And the second interesting point concerns the current reading, which still remains low compared to the past few years’ history. That is curious, since prices have already rebounded partway.
We have seen this type of disparity before. At the price lows in January 2016, February 2018, and Dec. 2018, we saw the total open interest in VIX futures remain low for a long time after prices had bottomed. The message was that speculators had been frightened away and were staying away, even though prices were rebounding. And in each of those cases, that persistent fear served to allow the uptrend to continue for a long time after the oversold price bottom.
This next chart looks at related data, showing the raw net position of the “non-commercial” (large speculator) traders of VIX futures. By “net position”, what I mean is that it measures the number of short positions they hold minus the number of long positions.
It too tends to move up and down in sympathy with stock prices. And the thresholds for “high” and “low” readings are a little bit easier to discern in the chart of this indicator. They had moved to an all-time high net short position back in November 2019, when the VIX was still hanging around near 12.
That high in the net short position did not mark the top for that up move in prices, which is curious but not without precedent. We saw a similar early top in this indicator ahead of the January 2018 top (when XIV went bust). So it can happen that way.
As with the total open interest data, the current low reading for the non-commercials’ net short position says that stock prices have a long way to move higher before we have another situation with excessive trader speculation. In other words, the new uptrend should live on.
Tom McClellan
Editor, The McClellan Market Report