Are VIX Speculators Offering Up a Bullish Stock Signal?

Large speculators are long on the VIX in numbers not seen in five years

Senior Quantitative Analyst
Nov 1, 2023 at 8:00 AM
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Each week, the Commodity Futures Trading Commission (CFTC) releases a report on the aggregate long and short positions in futures markets for different types of traders. This week, I will examine how large speculators are positioning themselves in Cboe Volatility Index (VIX) futures. These traders are almost always net short, meaning they hold more short positions than long positions.

The chart below shows that large speculators are approaching net long for the first time since the very beginning of 2019. Based on a visual inspection of the chart, it appears the VIX often peaks in these instances. Since stocks typically move in the opposite direction as the VIX, this would be a positive sign for the stock market moving forward. Let’s see if the data confirms this.

VIX Large Speculators IOTW

VIX Longs on the Move

The chart below shows the net long and short futures positions reported on the VIX for large speculators. The long positions are about double where they were to start the year. If this trend continues, it won’t be long before they overtake short positions, which does not happen often.

VIX Short and Long Positions

The table below shows the dates in which the large speculators became net long after at least three months of being net short. This confirms the VIX fell significantly following these dates, especially in the last three instances.

The next table shows the S&P 500 Index (SPX) returns for the same dates as the previous table. The returns are more mixed than I expected, given the results above. The one-month returns are acceptable, but the SPX was around breakeven in the three months following the past two signals.VIX Longs Over Shorts

The one-year returns were in double digits for two of the signals, but underperformed in the other two years. While you cannot draw conclusions from four signals, we can see that the VIX has tended to fall significantly after these signals, but the SPX returns have been mixed.

SPX Longs Over Shorts 

Here’s one more way I looked at it. I went back to 2013 and created groups based on the net positions in VIX futures held by large speculators. The latest readings have been in the highest 20% of readings (80th percentile). In these cases, the VIX averaged declines for each timeframe I looked at from a month out to a year. As you would expect, these VIX declines have tended to lead to positive S&P 500 returns, which you can see in the second table.

It’s surprising, however, that the best S&P 500 returns have not occurred in that same bracket of the top 20% of highest net position readings. The best returns occurred in the moderately low readings (20th to 50th percentile of readings). Based on how large speculators are positioned with VIX futures, we can expect the VIX to fall significantly from here and the SPX to perform well.

VIX SPX Returns off Readings

 

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