Wednesday, March 5, 2008

SPX to VIX Ratio Turns Up

Given my ongoing infatuation with the VIX:VXV ratio and the VIX:SDS ratio, one could easily assume that I have pushed aside an old standby, the SPX:VIX ratio. In fact, I have not posted a chart of the SPX:VIX ratio since the end of July 2007, at which point the ratio had just bounced from 60 to 75.

Fast forward eight months and the weekly chart of the SPX:VIX ratio shows a new low of 50 and a current reading of just under 55. It turns out that the bounce from last July was a temporary one and the ratio has since turned down to levels not seen since September 2003.

One of the factors I watch in this ratio is the distance between the current level and the (blue) 10% trend line [for an explanation of the 10% trend line, try “The SPX:VIX Relationship], which is now greater than any time it has been in the history of the VIX, with the sole exception of the 2002-03 bear market bottom.

Given that the SPX:VIX ratio appears to be turning up again (and ABK was just halted as I type this, so there is the potential for significant momentum flowing back into financials and the SPX if this turns out to be good news), there is a good chance that the bottom in this ratio will hold and the relationship between the SPX and the VIX will move back toward historical norms. I realize that the markets need to work through a considerable amount of credit and other financial turmoil before the SPX:VIX ratio returns to anything resembling a ‘normal’ number, but my gut – and the chart below – suggests there is a good chance the tide is turning right now.

4 comments:

Felix said...

Interesting how the SPX gapped up shortly after the ABK trading halt, but has been mostly down in the hour following, even below pre-gap levels.

otoh, it was during the lunch hour in NY, so who knows, maybe junior market specialists sold into the rally and found no bulls to oppose them? lol

tnt

Felix said...

nevertheless, my gut feeling is in agreement with yours.

Another boost to the financial sector in coming weeks will be the runup to the Visa IPO.... I would not want to be short deltas in the XLF, if that were my hedging strategy. :)

tnt

Felix said...

Whoa, that was ugly! Market was thinking bailout, ABK comes out with a public offering and drops $2 after the trading halt. MAR IV around 250%, yikes!

XLF down 1.7% vs. SPX down 0.3% -- so much for my gut feeling or opinions about hedging, lol!

tnt

Dr Bruce Hong said...

I came across your blog via Dr Steenbarger. I, however, have come to a different conclusion about the prospects of a turn-around. See my blog at: http://traderpsychology.blogspot.com/2008/03/update-on-big-picture.html
Nevertheless, right or wrong, I'm fascinated to see another individual using the SPX:VIX indicator.

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