The Commercial and Vix Fear Index

VIX Background

The Volatility Index (VIX) was created by the Chicago Board Options Exchange (CBOE) in 1993; according to the CBOE, the ‘VIX measures market expectation of near term volatility conveyed by index option prices of the S&P 500.

In 2004 VIX futures were made available for trading providing investors with a unique opportunity to speculate on volatility. In general a rising VIX index is correlated with a declining stock-market while a declining VIX index is correlated with a rising stock-market.

(In the chart above, the missing data is a result of the VIX not meeting CFTC’s reporting requirements)

Recent Activity

As the VIX made new lows in November, commercials were big buyers (green rectangle) while large & small traders were sellers in the marketplace; meanwhile the stock-market was at new yearly highs. In other words, investors were becoming very complacent as commercials were buyers of volatility at these low levels. Soon after, volatility returned into the market place as the VIX broke out and went on to rally around 2.5%. As the VIX broke out, the Dow Jones declined around 200 points in two days.

Over the last two weeks net-commercial position decreased by 1,044 contracts but remains elevated at a total net-long position of 2,895 contracts. Watch for this week’s COT report for more clues on future direction for the VIX and consequently the stock-market.

Broad Markets

Russell 2000 [ ]
Net-commercial position decreased by 828 contracts. This is starting to look like a repeat of the commercial setup before May’s meltdown. Simply put commercials are sellers and large traders are buyers. As soon as the yellow line (net-commercials) crosses below the white dashed-line I would then start to look for a top in the stock-market. From the chart it would be logical to expect this setup in the early part of 2007.

S&P 500 [ ]
Net-commercial position decreased slightly by 440 contracts.

NASDAQ 100 [ ]
Net-commercial position increased once more, this time by 1,252 contracts. What I find very interesting is that large traders are also big buyers over the last few weeks, which means that small-traders are responsible for all of the selling. This is a bullish setup in contrast to the other indexes.

Dow Jones [ ]
Net-commercial position continues to hover around the -22,000 level, increasing marginally this week by 117 contracts.

I would not expect a top in the stock-market just yet, especially when you look at the Nasdaq-100 chart, but the tide is slowly turning as best seen in the Russell 2000 chart.


Crude Oil [ ]
Net-commercial position increased by 4,343 contracts. I should note that commercials were buyers as oil rallied from $59 to $63. Meanwhile large traders were also buyers in the market, which leaves the small-traders as the lone sellers. Overall crude is setup for a rally, so keep watch for reversals and breakout opportunities.

Gold [ ]
Net-commercial position decreased by 2,444 contracts. From the commercial perspective I do not see a meaningful rally before we see a correction/consolidation.


US Dollar [ ]
Net-commercial position decreased by 3,292 contracts. This is a critical point for the US dollar index, if commercials continue selling after the recent breakdown; this will be a big negative for this market. Unless that happens, look for higher prices as the dollar is setup for a rally.

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