Tuesday, June 14, 2016

The VIX tail wagging the SPX dog

Mid-week market update: What's going on with the VIX Index? The VIX, which measures implied option volatility and a useful measure of "fear", spiked dramatically on Monday. While SPX did fall, the magnitude of the decline didn't match past VIX spikes. It prompted this tweet from Ryan Detrick:

Rob Hanna at Quantifiable Edges also observed that the combination of a VIX spike of this magnitude is unmatched by the shallowness of the fall in stock prices.

As you can see from the chart below, the VIX Index spent the second day above its Bollinger Band (BB), which has marked regions of limited downside risk in the past. On the other hand, the bottom panel shows the 10-day rate of change of the VIX Index, and such events have often foreshadowed further SPX weakness (see vertical lines).

What's going on? My analysis suggests that we are seeing the case of the VIX tail wagging the SPX dog.

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