With SP500 at New Lows the VIX Has Room to Run

Mar 2, 2009: 8:07 PM CST

With the S&P 500 at new lows not seen since 1996 – clearly surpassing those lows made in October and November 2008, you would expect the Volatility Index – or VIX – to be making new highs as well.  It’s not.  Let’s look at the VIX and see what clues it might be telling us.


In such an environment of fear and new price lows, one would expect a spiking Volatility Index, indicating that volatility is at correspondingly high levels (and that put and call options are thus more expensive to provide protection).  This non-confirmation is odd.

The bottom line shows the S&P 500 and the three corresponding lows that occurred in October and November (along with today’s swing low).

The VIX is trapped in a sort of triangle or rectangle consolidation, hinting that a break (to the upside) would carry prices to higher levels after forming this base, but honestly what is it going to take to cause the VIX to spike up to levels one would expect it to do so?

Look closely – though the S&P closed lower in November than it did in October, the VIX failed to spike to a new high.  Are investors becoming complacent and just accepting that lower prices are here to stay?  Is the VIX about to spike to new highs?

Traditional thinking states that we won’t see a (short-term) bottom until the VIX spikes and fear takes over… and if that’s the case, then it clearly hasn’t happened yet which implies prices have further to fall to the downside.  One observes VIX spikes (or peaks) at market turning points (however short-term in nature) and it doesn’t appear we’re likely to get a reversal off the levels the VIX rests at currently.  A 14% single-day gain is impressive, but not enough to break us out of consolidation.

For more context, Bill Luby at VIX and More details the VIX Index and the S&P 500 over the last two years, with a special overlay of new events and how both the VIX and S&P reacted.

To learn more about the construction and specifics of the VIX, brush up on the Wikipedia Article on the VIX.

Bottom line:  If classic interpretation on the VIX still ‘works,’ then we’re set for lower S&P 500 prices in the short-term and need to see a spike up in the VIX (‘fear’) before we put in any sort of price ‘bottom.’

Corey Rosenbloom
Afraid to Trade.com

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4 Responses to “With SP500 at New Lows the VIX Has Room to Run”

  1. BOTD Says:

    many many stocks are far from their 52 week lows.

    back in NOV 08 wasn’t the low list a lot bigger?

  2. Corey Rosenbloom Says:

    I’ll have to go back and check that – it could be that major names/large caps are just weighing down the indexes, which could serve as a non-confirmation of new lows.

    The Technology sector and the NASDAQ are holding above the highs but otherwise all else seems to be experiencing weakness. Even the Russell 2000 broke its November lows today.

  3. Reggie Perrin Says:


    I think the key here is that we are approaching the quarterly March expiry

    Over the last year/months many traders and market players bought puts with strikes at these key levels (ie 2003 lows and Nov 2008 lows).

    So unusually the index has fallen but implied vols have stayed low. The time decay on these (now) 3 week options is heavy.

    It will be v interesting to see how the mkt trades after expiry. That cd be the trigger for a very large move either way

  4. Corey Rosenbloom Says:


    Fascinating point – the bear market levels would certainly be targeted by participants for protection. Here we are at those levels.

    The feeling I get is that most people expected this to happen and/or took it for granted. I’ve been saying it publicly since mid-January and even among the Fundamental crowd (at the Money Show in Orlando in early February), almost all panelists said publicly that yes, we’re going to break the November lows.

    Now that they’re broken, it’s almost an afterthought.

    But if price fell sharply from here, that would surge the VIX and challenge assumptions. I think the assumption now is “Well, we hit these levels – we should be seeing a big counter-move up now”

    Perhaps that too is what’s keeping the VIX Low.