VIX logs wild swings in open interest (again), S&P 500 seeks direction

The weekly COT report revealed another wild volume swing on the VIX futures contract, only this time to the downside. Open interest increased by 98.9k contracts two weeks ago, which was its second fastest increase on record, prompting me to suggest a cycle low for volatility. Yet last week open interest declined by -129k contract – which was its second fastest weekly decline on record.

At a basic level we could assume that whatever prompted the surge of VIX activity the week prior was unwound last week. But it is not often we see such volume spikes on the VIX, so it should at least be noted.

Asset managers and large speculators remained net-short VIX futures, although both set of traders were less bearish to a degree. But as this OI data looks at the futures market in aggregate, it does not reveal which subset of traders is mostly responsible for the dramatic increase and reduction of trading activity over the past two weeks.

If we look at *seasonality data for the VIX, a couple of things have caught my eye.

1. The month-over-month returns for VIX have averaged positive gains in May and June
2. Yet they have actually closed lower 65% of the time over these months

* Past performance is not indicative of future results: Seasonality simply looks at average returns from historic periods (in this case by each month) and should not be used as a roadmap for futures performance. However, it can be a useful tool alongside other forms of analysis to try and spot patterns or opportunities.

Whilst odds favour a lower VIX, its upside gains have overpowered the downside losses to produce a positive average return. And this makes sense as the VIX tends to rise harder than it falls. But when we consider that the VIX reached a 4-year low just a couple of weeks ago, US economic data is souring and we likely have a ferocious race to the Whitehouse cuing up, a higher VIX does not sound like such a crazy proposition to me.

However, we’re yet to see such concerns on the S&P 500. And should the VIX remain low, we could well see US indices climb higher. Particularly if incoming US data is soft enough to allow for rate cuts, but not too weak to ring recessionary alarm bells.

S&P 500 futures technical analysis:

The market reached its latest record high two weeks ago before retracing and finding support around the 5200 handle. The weekly chart shows that trading volumes are declining, and are lower relative to Q2 2023 volumes. Whilst this suggests weakness to the trend, it doesn’t mean it cannot print another series of highs.

The daily chart shows a strong bullish engulfing candle just above the 5200 support zone, which includes prior weeks’ highs and lows and a high-volume node. And that candle could form the end of a bull-flag, which could suggest an attack on the highs sooner or later. Given the trading volume for the bullish engulfing candle was higher than the bearish engulfing candle at the record high, it seems bulls have the slight advantage over the near-term. And whilst Monday’s hammer / inverted pinbar candle warns of another attempt at breaking below 5200, bulls might seek dips within the bullish engulfing candle’s range.

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge