Friday, March 28, 2008

Yesterday’s Unusual VIX and SPX Action

As I mentioned yesterday in VIX Follows Markets Down in Early Trading, it is rare for the VIX to drop when the S&P 500 is down and rarer still for the VIX to be down when the SPX is down 1% or more. In fact, when the SPX closed down 1.15% yesterday and the VIX ended the day down 0.77%, it was only the second time since April 2003 that the VIX gave up ground on a day in which the SPX lost more than 1%.

Looking at all 22 times since 1990 in which the VIX has been down on the same day that the SPX has posted a 1% loss yields an interesting clustering of data. The first 10 instances are clustered in 1990 and early 1991 and are associated with all of the uncertainty leading up to the Gulf War. After a nine year hiatus – the famous 1990s bull market – the next clustering of data consists of ten instances from May 2000 through April 2003, roughly from the beginning of the bursting of the dot-com bubble to the point where the markets began to confirm a bottom with a series of higher highs.

The most recent example of the VIX falling on a day in which the SPX was down 1% or more comes from January 4, 2005 and was largely the result of the fallout associated with the magnitude 9.3 Indian Ocean earthquake. This was the second largest earthquake ever recorded (at least on a seismograph) and together with the resulting tsunami, was responsible for over 200,000 deaths.

It remains to be seen whether tectonic forces were responsible for the unusual VIX and SPX action yesterday. History suggests that these days can occur at either the beginning or the end of a bear market. While the SPX has generally outperformed historical norms in the weeks following a 1% drop in the SPX accompanied by a negative VIX, history also suggests that a safer conclusion to draw from a day like yesterday is increasing volatility around the corner.

11 comments:

Bill Luby said...

Interestingly enough, that unusual phenomenon of a falling SPX and VIX continued today, with the SPX down 0.8% and the VIX down 0.7%.

Because of 'calendar reversion' this is less unusual on a Friday, but given the magnitude of the drop in the SPX today, I'd say that the numbers are interesting in spite of the calendar.

Anonymous said...

Bill, I checked my data and it appears to me that on January 5, 2004, the SPX was up. About 1.2%. What am I missing?

Eric

Anonymous said...

Eric,

it was January 4, 2005 instead of January 5, 2004 (just a typing error).

Best regards
Frank

Anonymous said...

BILL ,

RED FLAG WARNING IS THIS MARKET AFTER A GOOD RUN UP IS BECOMING COMPLACENT IN THE PULL BACK. i INTPRET THIS AS BEARISH SHORT TERM. vIX NOW AROUND 7% BELOW IT'S 10 DAY MA. nOT A GOOD COMBO IN A BEAR MARKET . bILL i WOULD LIKE TO HEAR YOUR PERSONAL TAKE ON THIS

Anonymous said...

we also have to look at the spread betwen the cash and the future April.. it very bullish for the vix and all the technical indicators lock like we will have a spike on the vix next week ....

punky trader....

Anonymous said...

I commented about this strange vix action on other boards. My take is that the short interest has been so high the past few weeks that not many investors need to reinforce their short positions, causing the vix to remain almost flat despite the down days. This is the only thing keeping me from being extremely bullish on VIX.
Dennis

Bill Luby said...

Frank,

Thanks for flagging the typo, which I have just corrected. The correct date is indeed Jan. 4, 2005.


Anon and punky,

Regarding complacency, I do see some of that, but not enough to be a particular cause of concern. For one thing, the VIX:VXV and spread between the cash VIX and VIX Aug. or Nov. futures are in line with normal readings.


Dennis,

I agree with your thinking here and would add that since August there has been ample opportunity for any market players to load up on puts either as hedges or as speculative vehicles. I suspect it has been months since anyone thought they had seen the last credit crisis cockroach. At this stage, it is a lot harder to imagine someone getting caught off guard by bad news and suddenly rushing to buy puts.

Enjoy the weekend, all,

-Bill

Anonymous said...

I bill,

Do you realy think that the spread betwen VIX and VIX nov or august are realy important ..( no volume on thoses contrats)? for me I always follow the spread two month so april may .... When I look at the daily chart with williams % and CCI and the spread against future I realy see a spike coming soon .. ? don t you ? talking for short term ....

Punky trader

PS sorry for my english ......not my language .... congratulations for you blog

Anonymous said...

Punky trader,

the current premium in VIX April '07 futures (front month) over the cash VIX as of 0.94 is really nothing to write home about.

The cash VIX' 10-day moving average is currently at 27.49, so with 25.71 the cash VIX is well below its 10-day moving average, and with a settlement value of 26.65 the VIX April '07 future would not even anticipate a regression to the (10-day) mean in the cash VIX, let alone indicate a "spike" in the cash VIX.

Additionally if you take into account that there is a more than 70% probability that the cash VIX opens higher after a weekend than it closed on the last trading day before the weekend (on average approximately 0.75 points higher) and that there is a clear tendency for defensive action in the current market environment (especially before a weekend when everything could happen), a premium of 0.94 (which would approximately equal a 1% drawdown in the S&P 500 under normal circumstances) is rather astonishing low than high (let alone an indication for a "spike" in the cash VIX, which may happen nevertheless, but not indicated by the VIX front month future).

Best regards
Frank

Anonymous said...

.. sorry for the typo, I meant VIX April '08 (front month) futures, not April '07.

Frank

Anonymous said...

The inverse relationship between the VIX and the SPX continued yesterday as the VIX decreased by 11.44% to 22.68 (-2.93) and the SPX increased 3.59% to 1370.18 (+47.48). The unusual phenomenon of a falling SPX and VIX may have been a short-term aberration, particularly since it occurred near a support level of about DJIA 12200 that appears on the three-month Bigcharts graph.

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