Will a Rise in VIX Mean a S&P 500 Selloff?

The Volatility Index, VIX, is a statistically derived measure of the volatility in the S&P 500 options, looking at both puts and calls. So theoretically it is a leading indicator from options traders of the future volatility of the S&P 500, or the SPY ETF which mirrors it. This is why it has importance. The recent basing of the VIX has led to many debates about the what happens next. Historically it has been lower and stayed this low for long periods of time. But other indicators lead some to think it is ready to explode higher. So a spike higher in the VIX might create a market sell off. But, remember, that volatility can increase by a move down or up. What did you say, a rise in the VIX always means a move down in the market? I beg to differ. Let’s look at the history.

The chart above is a monthly chart of the VIX for the past 20 years. The recent spikes in 2009 and 2010 did actually lead to a fall off in the S&P 500 as noted in the lower frame. But also notice that the period between 2004 and 2007 the VIX was below where it is today. But most interestingly, look back to the period between the two blue lines from 1995 to early 1999. During this period the S&P 500 increased about 300% from around 400 to over 1200. At the same time the VIX moved from lows near 11 up to near 30. So both increased almost 300% at the same time. It seems the S&P can rise while volatility is rising. I do not profess to know what will happen with the VIX or if it will move higher. Preparing for a potential move in the VIX and then a reaction in the S&P 500 is prudent risk management. But expecting that move to happen and then expecting a sell off seems premature given history.

As always you can see details of individual charts and more on my StockTwits feed and on chartly.)

If you like what you see above sign up for deeper analysis and trading strategy by using the Get Premium button above. As always you can see details of individual charts and more on my StockTwits page.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

blog comments powered by Disqus
Dragonfly Caps Blog