Hi Wai-Yee, I noticed the Aussie VIX dropped down to 12.16 today. How long could it stay at these levels ? From our previous talks I have been watching it each day and see its come down from 20 last month. What are your thoughts about the Aussie VIX and the ASX 200. Kind Regards Jon.
You have brought up a very interesting topic.
At a reading of 12.16 on 10 Dec, the XVI was at an all-time low! The obvious flow-on question then is, what does it mean for the XJO, which you have asked also.
What is XVI?
The XVI (or short for the S&P/ASX 200 Volatility Index), for those who have not been following, is the Australian VIX Index, launched by the ASX not too long ago. It is liken to the popular CBOE VIX index which is widely followed as the “fear gauge” of the stock market. VIX or XVI for us, measures the volatility of the Index. The market convention is that if volatility is high ie. VIX is high, then there is increased uncertainty in the market and markets tend to fall, hence fear is high and vice versa.
Now, what we have is an all-time low XVI, which means there is a lack of the fear factor in the market currently. Does it mean that the market is bullish? This is what we will try to find out by looking at the XJO from different angles from the options perspective.
We experienced the most recent high of 4815 on the XJO on 5 November. On that day, the XVI was at 18.29. On 10 Dec, despite the XJO having a reading of only 4750 (high of the day), the XVI was at the lowest point of 12.16. If I could show you the chart (coundn’t get it posted), you will see two spikes, the latest one with a lower peak, at the moment. This is indicating that the market is now more sanguine than a month before, eventhough we are not quite at the last high of above 4800 level. This is a bullish indicator.
Another indicator to look at is the Put/Call Ratio. What is Put/Call Ratio?
It’s a measurement of the number of puts versus the number of calls traded. It’s a division of Puts over Calls. A reading of greater than 1, signify more puts bought than calls on the underlying.
For those who don’t follow the Put/Call Ratio on XJO, it’s quite common for the XJO’s ratio to be greater than one, as institutions or investors buy the XJO Puts for portfolio protection.
The Put/Call Ratio for the XJO at the week ending 5 November (when the XJO hit a high of 4815) was at 1.83. Last week, when the XVI was at the lowest point of 12.16, the Put/Call ratio of the XJO has reduced to 1.17. Again, if I could show you the chart, you will see the gradual decline of the ratio in the last month, though the market is still not at the high it was a month ago. This is a very bullish indicator for the XJO.
The reading of the current low 1.17 is indicating that institutions/investors/traders are taking positions in the market without hedging or not taking as much protection as normal. This is demonstrating that they have a bullish view of the market and do not think protection necessary at this juncture. Whether this turns out to be a prudent stand, we shall see, but this is the thinking of the market at the moment.
The two indicators above are signalling to us that market participants do think the market is heading higher. If I were to cast a larger net and look at the market as a whole as well (a part from options indicators), where the market has been and how it has been performing, I do agree with the general consensus, that we are heading higher for now; but, it would do so at a snail pace, in contrast to a rocket up performance. So, patience is required to make money in this market.
Well, as stock markets are prone to doing what we don’t expect it to do, do check in again, for changing market conditions.
I hope this has been helpful, but remember, this is only my view, it is not necessarily RBS Morgans’ and that I can’t give advice in this forum and I can be wrong!
Have a Merry Christmas and enjoy the ride up!