Greece-Induced U.S. Stock Losses Look Overblown to VIX Traders

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Don’t fret too much about the reaction in U.S. stocks to Greece, according to traders in products tracking volatility.

Futures contracts tied to levels on the Chicago Board Options Exchange Volatility Index are showing signs that last week’s swoon, which sent a measure of turbulence surging the most since 2013, was overblown. A popular exchange-traded note whose value appreciates with market calm is attracting the most cash in nine months.

American equities’ slide, which shook the Standard & Poor’s 500 Index from nine weeks of slumber, came as concern mounted that Greece will exit the euro. Speculators saw the decline as an opportunity to place bets on a lower VIX -- essentially a prediction that stocks will weather talks between the country and its lenders.

“People are trying to fade the Greece pop in the VIX,” said Stephen Solaka, managing partner of Belmont Capital Group in Los Angeles, which oversees about $250 million in assets. “Volatility in the near-term spiked pretty high, but now the market is trading like it’s all blown over.”

Overblown Panic

While speculators have bid up VIX derivatives expiring July 22, they’ve become reluctant to spend more on future months, a signal that has preceded bounces in the stock market. Contracts on the VIX expiring July 22 climbed as much as 0.2 points higher than those expiring Aug. 19 in intraday trading.

The last time the front-month VIX futures contract closed above its second-month counterpart was on Feb. 2, after the S&P 500 lost 3.1 percent to begin 2015. Equities rebounded, recording their best month in three years in February as the VIX dropped the most on record.

Traders expressed the same bullish sentiment in the VelocityShares Daily Inverse VIX Short-Term ETN, adding more than $204 million to the fund in the four days ending July 2. That’s the biggest inflow for a calendar week since Oct. 17.

The S&P 500 dropped 0.4 percent to 2,068.76 on Monday as traders weighed negotiations over Greece’s financial crisis before a meeting of euro-area leaders today. The VIX climbed 1.3 percent to 17.01.

While they sold riskier assets earlier in the day after Greeks voted in a referendum Sunday to reject their creditors’ austerity terms for aid, losses in the S&P 500 were muted compared with what happened a week ago.

‘Mild Reaction’

On June 29, U.S. stocks plunged 2.1 percent and the VIX posted its biggest daily move since April 2013 after Greece shut its banks and imposed capital controls. The selloff jolted equities out of a two-month slumber, in which the S&P 500 went nine consecutive weeks without a move of at least 1 percent, its longest streak of calm since 1993.

“Greece has obviously grabbed headlines and although it’s been the dominant focus, markets have said they don’t think it’s going to be a major problem,” said Bruce McCain, chief investment strategist at the private-banking unit of KeyCorp in Cleveland. His firm oversees in excess of $25 billion in assets. “Given how clear it is that Greece is coming out of the euro zone, there’s been a pretty mild reaction to what was considered big news last week.”

The VIX jumped 9.2 percent to 18.57 at 11:03 a.m. in New York. The S&P 500 lost 0.9 percent to 2,049.44.

As VIX speculators breathe a sigh of relief, hedge fund managers aren’t convinced U.S. equities are out of the woods. In futures tracking the S&P 500, bearish positions outnumber bullish ones by the most in three years, according to data compiled by Bloomberg and the U.S. Commodity Futures Trading Commission.

Rising short sales have sent a gauge of manager bullishness compiled by Evercore ISI down 1.3 percentage points over the past month, putting the measure of short and long exposure close to neutral.

The VIX climbing above longer-term volatility gauges signals the market’s current stress may subside soon, according to Scott Maidel at Russell Investments. The VIX, which measures demand for weekly and one-month S&P 500 options, jumped to 18.85 on June 29, while CBOE’s measure of 90-day S&P 500 options costs, known by its ticker VXV, closed at 18.72.

“Given the moves in the S&P 500, implied volatility, term structure and volatility of volatility seem to be overreacting for now unless we see some major and sustained downside momentum in U.S. equities,” said Maidel, an equity-derivatives portfolio manager at Russell, which oversees $272 billion.

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