VIX Dispersion is Narrowing
Is A Tsunami in Volatility Coming to Wall St. This Christmas?
In 2017, I won the Charles H. Dow Award from the CMT Assoc. for my paper, Forecasting a Volatility Tsunami. The paper has been downloaded over 11,800 at SSRN.
In the paper I go into detail about looking at periods of time when the dispersion in the daily movement of the VIX Index narrows, meaning there’s been little movement in the day-to-day changes. This has historically ‘opened the door’ for spikes to occur in Volatility. I highly encourage reading the full paper if there’s interest in the topic, as the above is a very broad and basic summary.
With that said, we are now seeing dispersion narrow, and the Thrasher Analytics Volatility Risk Trigger (VRT) has increased from 24 to 48 (Premium subscribers of Thrasher Analytics get weekly updates on the VRT and the thresholds to produce a signal). While the level of dispersion is not yet to a level of significance, the direction its moving suggest it could be in the coming days/week.
This is interesting to me because it comes at a time when we are approaching one of my favorite seasonal setups for the Volatility Index. While not directly associated with dispersion, this setup has done an excellent job in the past of marking major lows in the VIX. I’ll be discussing this in much greater detail in an upcoming premium note for subscribers.
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