Sunday, August 2, 2009

Chart of the Week: Recent Rising Weekly VIX and SPX

With all of the interest being generated by Friday’s Is the VIX Being Gamed? I thought it might be a good time for this week’s chart of the week to build on a tangential subject: the meaning of a simultaneous rise in the VIX and the SPX. Lately I have heard more than a few observers comment that the recent positive correlation between the VIX and the SPX – specifically the simultaneous rise in each index – is a bad omen for stocks.

Frankly, the SPX:VIX correlation is a subject I have been blogging about since the early days of the blog, with some of the more memorable posts on the subject included in the links below. So far I have published very little on weekly correlation data for the VIX and the SPX, but that is about to change, starting with this post.

The chart below shows weekly bars of the SPX and VIX going back to the beginning of 2008. There have been five instances since the beginning of 2008 in which both the VIX and SPX have risen in the same week (a relatively low number by historical standards largely because a large majority of weeks during this period have seen the SPX lose ground.) All five instances have been flagged with a blue arrow on the chart.

While five instances is a long way from being able to draw any meaningful statistical inferences, I think it is interesting to note that there were two consecutive weeks of gains in both the SPX and the VIX just prior to the sharp drop from September through November 2008. On the other hand, both the SPX and VIX in the middle of March, just as the March to July 2009 rally was gathering steam. Finally, the early June 2009 blue arrow seems to fall at a relatively uneventful time in recent stock market history.

The bottom line: don’t read too much about the SPX and VIX moving up in the same week.

For more posts on this subject, readers may wish to check out:

[source: StockCharts]

Disclosure: Long VIX at time of writing.


Anonymous said...

I fully agree with the conclusion of this and I have backtested it. There are a few bloggers out there who keep talking about the VIX & S&P correlation in that VIX rises in a given day or week and the S&P does aswell so they should fall the following day or week because they have done 9 times out of the last 12 or some other statistically unmeaningful number

The fact of the matter is that over a longer duration.....a few years....the ratio as a simple strategy just does not work

However, what would be great would be to understand if another indicator can be used to filter out any false trades in the above VIX & S&P Strategy

I am not saying its a dead end road. Simply that some filtering techniques are required

Anonymous said...

anom, what would be a good filter would be... are we at a top or bottom.

Anonymous said...

It appears your VIX:VXV ratio has not been predictive this time around despite its drop well into the bearish zone.

Could that change in behavior be significant (i.e. transition from bear to bull, for example)?

stonebat said...

the vix tends to go up when more hedging is bought. what if more people hold their shares when the hedging goes up? spx and vix could go up together in that case. that slight bearishness could fuel up the final leg up as more bears give up.

Anonymous said...

all this is meaningless. the only strategy that has worked is buy stocks and close your eyes. until that changes, we all must recognize that data-wise there are no historical precedents for this market, so looking at studies is purely useless.

Anonymous said...


Don't give up. Wall Street is a game of institutional investors destroying retail investors' money by shorting but in order to short, they must first suck in retail investors' money and the market is in this sucking stage right now. It should end soon.


If the market keeps rising, they'll be giving you free money and who do you think you are that they'll keep giving you free money like this?

VIX and SPX go up at the same time because as the market rises, investors cover their put shorts and put buying drives up the VIX even though the market rises.

It's that simple.

Anonymous said...

yeah, what stonebad say make sense to me.

Anonymous said...

"Don't give up"

What you just described is your opinion, without any data to support it. you're casting the market in moral terms, and doing that is not useful. let me know when you develop some quantifiable rules that support your vision of market morality.

Bill Luby said...

Between 'free money' strong earnings and some positive jobs data, I think the urgency related to hedging is declining. Rather then locking in profits, I think some retail and institutional investors alike are now more inclined to let their longs ride this wave as far as it will go.



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