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Equity Volatility & High Beta Stocks
July 5, 2017

The VIX is the ticker symbol for the Chicago Board of Options Exchange’s (CBOE) Volatility Index. It represents the market's expectation of future 30-day volatility through the implied volatilities of a wide range of S&P 500 Index (SPX) options. High beta stocks generally record monthly rates of change that are 25% greater than the percentage SPX price moves. Figure 1 plots the month-end VIX as a histogram behind the total returns of the S&P 500 High Beta Index divided by SPX returns (SPHB:SPX, top panels) since May 31, 2007. The middle and bottom panels plot SPHB and SPX’s cumulative returns of 21% and 58.3%.

The top panel of Figures 2 plots the VIX price while the top of Figure 3 shows the returns and dollar growth of the Arrow Insights VIX Index (AIVX), which opportunistically takes long/short exposures in VIX futures (CBOE: VX) while being in cash (no exposure for 45% of the time). The middle and bottom panels plot the VIX’s and AIVX’s 12-month correlations to SPHB and SPX.

The NASDAQ 100 Index has a high beta to SPX. Figure 4 tracks the percentage of stocks within this index that are at 52-week or 12-month new highs (RNNDX) and its 12-month correlation to the Dow Jones Total U.S. Stock Index, which is a broader index of domestic stocks than SPX. There will not be an InFocus next week as we prepare for our bi-annual review when we publish InPerspective in two weeks. We will continue to focus on equity volatility and pay special attention to various long VIX strategies and short VIX strategies.

InFocus Highlights: (Fig 1-3 begin May 31, 2007. Fig 4 starts June 30, 2002. All figures end June 30, 2017)

  • Peaks in the SPHB:SPX ratio are designated by circles in 2007, 2011 with matching peaks in 2015 and 2016. The first two peaks are associated with investor complacency (a low VIX) near tops in SPHB and SPX prior to a bear market in 2008-2009 and minor correction in 2011 (Figure 1).

Figure 1. The High Beta to SPX Ratio and VIX

  • VIX declined -5.3% in June 2017 and is down -18.9% since May 31, 2007. The monthly VIX peaked near 60 in October 2008 as it rose about 400% from its low earlier in 2008. Ninety-nine per cent of the time, VIX records negative 12-month correlations to SPHB and SPX (Figure 2).
  • AIVX rose 6.3% in June 2017 and is up 1899.6% since May 31, 2007. The monthly AIVX peaked on June 30, 2017 at $399.64. It rose from $13.92. From the middle of 2013 through 2015, AIVX lost -30.2% as SPX volatility quietly fluctuated from a low near 12 and a high near 22. AIVX primarily records positive 12-month correlations to SPHB and SPX (Figure 3).
  • The NASDAQ 100 is currently well off its 2014 reading when nearly all of its stocks were at new 52-week highs. SPX earnings are not shown but they also peaked in 2014 (Figure 4).

Figure 2. VIX, High Beta & SPX

Figure 3. AIVX, High Beta & SPX

Figure 4. New Highs within the NASDAQ 100 & 12–month Stock Correlations

DISCLOSURE: This report is not intended to, and does not, provide investment advice. It was prepared without regard for any investor’s specific circumstances or objectives. The securities shown may not be suitable for all investors. Arrow Insights recommends that investors independently evaluate particular investments and strategies. The appropriateness of an investment or strategy will depend on investor circumstances and objectives.

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