I’m aware that Labor Day is early this year, but is not that we didn’t know September is coming. Despite the approach of the month that might bring tapering has been known for some time, the markets appeared to begin their expected reaction last week. The addition of the escalating crisis in Syria helped to push VIX up over 20% and the front month September future up by just over 15%. The curve is in a ‘normal’ contango shape is still in place. September is at a 0.49 premium to the index, which is respectable even with the three day weekend.
The NASDAQ-100 was also under pressure and VXN rallied almost in lockstep with VIX. Times of high volatility often are accompanied by a narrowing of the spread between VXN and VIX. Usually VXN is at a premium of a 1.00 to 1.50. The spread is 0.52 right now. We have a bit of limited history to work with, but I have been doing some work on the VXN minus VIX spread and how to interpret it as an indication of macro risk (where VIX may rally more than VXN) and stock market specific risk (like right now – tapering hits stocks). Any thoughts are greatly appreciated!