Anatomy of a VXX Breakout

Headlines regarding the recent explosion in equity volatility were somewhat hyper-focused on the pitfalls of trading volatility derivatives, for which the soon-to-be liquidated VelocityShares Daily Inverse VIX Short-Term ETN (XIV) was the unfortunate "poster child." But while markedly less catastrophic and climactic, the price action of late in the iPath S&P 500 VIX Short-Term Futures ETN (VXX) has been no less remarkable.

We've noted previously in this space that VXX is, in essence, engineered to slump steadily toward worthlessness as long as the CBOE Volatility Index (VIX) futures from which it derives its value remain in contango (i.e., an upward sloping term structure). But by Feb. 9, VIX futures had swung to backwardation by their largest margin since the 2008 financial crisis -- delivering some long-delayed gratification to VXX holders.

The "fear surge" that swept the equities market earlier this month was sufficient to propel VXX north of not only resistance at its 50-day moving average, but also its 200-day trendline. VXX then went on to notch eight consecutive daily closes atop its 200-day -- the longest such streak above this benchmark moving average since early 2016, when stocks endured a similarly volatile start to the calendar year.

But while there have been a number of broad-market shocks in recent years that have carried VXX up to or above its longer-term, under-the-radar 320-day moving average -- including those in October 2014, January and September 2015, and January 2016 -- this latest VIX explosion didn't meet that bar. At its Feb. 9 intraday peak of $56.50, there was still plenty of daylight between VXX and its 320-day moving average. The exchange-traded note would have needed to rocket another 3.6% that day, to be specific, before running into that trendline.

Meanwhile, as VXX vaulted higher, traders showed little urgency to pile into the suddenly hot volatility tracker. Per etf.com data, the two-week period ended Feb. 14 actually resulted in net outflows of $172.8 million for VXX.

Given the relatively brief history of VXX, which made its debut shortly after the aforementioned 2008 VIX backwardation event, there aren't too many prior examples of the ETN rallying above its 200-day moving average but stopping short of its 320-day. In fact, there's exactly one we can find, and it occurred in early December 2015. Following that instance, VXX experienced a brief cooldown before spiking again, this time topping out at (a reverse-split adjusted) $493.60 -- well above its 320-day moving average -- by the time the dust settled in February 2016.

So while VXX has already pared some of its heady early-February gains, bear in mind that the surge in this instrument was fairly tame in comparison to past pops -- and with VIX still holding above both its 2017 calendar-year highs and a 50% year-to-date return (at 17.28 and 16.56, respectively), it might be fair to say there's still some fear left to be wrung out (and some more choppy trading ahead) before we return to a state of calm in the stock market.