I had a bunch of questions yesterday on the seemingly strange disconnect we saw in the markets where the S&P 500 was up strongly but the VIX index was also up on the day, and the volatility products actually didn’t make any gains. I was very happy to see so many of you are paying attention to the markets to notice something like that.
I’m trying to figure out a way I can introduce a new type of video series where I can actually show people how to test things like that in Excel and actually flush out some answers to these types of questions. I really don’t mind telling people my thoughts through so by all means, keep asking, but it may also be impactful in your learning journey to try to reach some conclusions on your own as well. So I’ll find a way to shoot a few videos showing people the basics of how I arrive at the charts and conclusions in my blogs.
Recall that the VIX index is a statistical measure derived by S&P 500 options activity that represents the markets 30-day forward expectation of how much the S&P 500 will move. That’s really all the VIX is. A measure of how
Notice I didn’t say anything about direction? That’s because the VIX index is directionless. A lot of media outlets and blogs etc talk about how the VIX goes up when stocks go down and vice versa. After all, it is the “fear index” right? While that may be true most of the time because the VIX does have a long-term negative correlation to the S&P 500, it’s not always the case.
Without getting too much into the specifics, my point is that the VIX can also go up when market participants are buying call options in anticipation of stocks continuing to go up. It’s possible that a rising VIX is actually because of bullish bets on stocks. That’s something that isn’t talked about much but very true about the nature of the VIX, it’s directionless. It only measures how much people think the S&P will move and says nothing about the direction.
But let’s get into a few charts. First, how often does the VIX rise with the S&P 500? Well, often actually.
It’s a messy chart but if you look closely you can see that the number of occurrences increases when stocks are in stronger uptrends.
If we clean that up a little bit and only measure days when the VIX rises by more than 1% and the S&P 500 rises by more than 0.25% (as it did yesterday) the number of occurrences drops to roughly 2.5% of trading days.
So what we saw yesterday was a little bit abnormal in the sense that it only happens on roughly 1 in 40 trading days. However, it’s possible that it represents a little bit of FOMO (fear of missing out) to the upside and some frantic S&P 500 call buying in expectation of rising equity prices. Or it could be a worrisome disconnect, we won’t know until after the fact. Ha, thanks Brent for that brilliant assessment!
Many people don’t study history but for me, I’m always pouring through old numbers to get a larger data set and perhaps learn a few things about what’s happened before and may happen again. Check out how the VIX index
That’s FOMO call buying and can cause the VIX to rise with the S&P 500, and perhaps for extended periods of time. So I’ll be keeping an eye on things and as always if something negative does materialize in the markets we’ll just take what comes. We can move to safety positions on a single days notice if necessary.
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