Traders Are Fleeing A Popular VIX ETF
With traders trying to price in "known unknowns", there have been some unusual moves in volatility and options indicators.
In yesterday's Report we touched on the VIX and how it has jumped nearly the most in 30 years for such a small pullback in stocks. That had been preceded by some minor inflows to popular VIX exchange-traded funds like UVXY, the ProShares Ultra VIX Short-term Futures ETF.
UVXY is one of the worst products in history, having lost a breathtaking amount of value in its not-quite 5-year existence. The fund battles the losing trends of declining volatility and futures rollover, costing buy-and-hold investors in the fund almost daily. This is NOT an appropriate fund to use other than for very short-term trades, like any other leveraged ETF.
Regardless, traders pulled more than $150 million from the fund on Monday, one of the largest single-day outflows in its history. The suggestion is that even with an uptick in volatility, traders are betting it won't last...and that is a contrary signal.
But knee-jerk contrarianism is a dangerous thing, as we see so often in our studies. It's no difference with flows in UVXY. The table below shows returns in UVXY following days when traders pulled more than $50 million from the fund for the first time in at least a month.
We've often suggested that volatility traders are "smart" and it pays to follow their moves more often than not. These big moves in fund flows are no exception. Over the next two weeks, UVXY lost an average of 24% of its value, far worse than even its usual terrible performance.
As for the S&P 500, two weeks after those dates it was higher 9 of the 10 times, averaging 3.2%.
So the fact that traders are leaving the fund in a hurry should not be construed as a contrary bullish sign for volatility (and bearish for stocks). If anything, it's a negative for volatility and positive for stocks.