Tuesday represented a massive rebound for the equities markets. In fact, in sheer points, we saw the largest bounce back from Monday’s lows in history for a number of indexes and their related futures contracts. This is NOT to say that these were the biggest percentage rebounds in history, but they were still very large. On top of this, the VIX’s rise was the biggest ever in comparison to the percentage declines experienced by the S&P, actually going up over 2X what the average for such a percentage drop.
But the VIX is still relatively high, mostly due to the fact that most of the markets were caught off-guard by the action on Monday, and firms such as Credit Suisse experiencing record losses for their VIX etn XIV, with this etn now scheduled to be closed out by the end of February due to the magnitude of losses. XIV is an inverse VIX etn, meaning that it holds short positions in VIX futures products. Thus, with the enormous jump in the VIX on Monday, futures prices skyrocketed and caused XIV to collapse under the weight of its leveraged positions.
The massive volatility we saw on Monday was not replicated on Tuesday, but volatility was still high overall. Day traders in futures and equities had two of the most opportune situations for making potential profits as the markets had big swings up and down all day, with Monday being biased lower and Tuesday the opposite. Tuesday also presented a great opportunity for value investors to pick up shares of their desired stocks at substantial discounts over prices from only a week ago.
But things are not in the clear yet. The debacle caused by the spike in volatility in the VIX has clearly forced many traders to offset their risks elsewhere, or liquidate positions they held in order to cover losses. This has caused clear swelling of implied volatility levels for nearly all stocks in the near term, and we still have the aftermath visible in VIX products as large shorts continue to unwind positions the are massively upside down. Expect it to take another week for things to get back to more normal activity, but in the meantime, take advantage of whatever good opportunities you can find.