Year to Date New Highs in Stocks but Not New Lows for VIX

Nov 9, 2010: 11:13 AM CST

With stocks at new 2010 highs, what is the VIX – Volatility Index – printing on its year-to-date chart?

Let’s take a look at the SP500, VIX, and then an overlaid SPX and VIX Chart to gather insights from this important indicator.

First, the S&P 500 to serve as a reference:

I’ve posted about this frequently so I won’t repeat the same commentary, but I did want to call the attention to the S&P (as well as NASDAQ and Dow Jones) at fresh new 2010 highs above their respective April highs.

The VIX – also called the fear index – is a measure of implied volatility of selected options premiums (puts and calls) that generally measures traders perspectives on current and future volatility in the market.

The way it’s constructed, it trades inverse stock prices, such that a rising VIX is indicative of rising option premiums and rising volatility during a period of stock prices declining, while a falling VIX reveals more complacency, less fear, and lower options premiums.

That being said, the correlation is certainly not 100%, as we can see in the chart below.

Next, the VIX Year-to-Date Chart:

The traditional thought would be “Because stocks are at new highs, the VIX must be at new lows” but it’s not.

The VIX traded down to the 15 index level on April 12th, which was a few weeks prior to the official stock market peak on April 26th.

After the “Flash Crash” (notice the massive spike was percentage-wise much larger than the stock market decline), the VIX then calmly drifted lower from July to present as the stock market crept its way higher.

Now, with stocks at new highs, the VIX is shy of its 15 level index low from April, and is currently at the prior support level at 17.50.

That’s not saying a rally is expected, but just that complacency – if we take the VIX at its word – is not as ‘high’ as it was during the market top in April.  Thus the VIX could be said to fall just a little lower which – if that were the case – stocks would continue their rally.

That’s certainly something to keep an eye on if that does happen – watch the VIX 17.50 level carefully to see if an inflection happens here or not.

Finally, a combo of SPX and VIX for comparison:

And this is just a simultaneous overlay of the S&P 500 and the VIX, as seen from data in a line chart for absolute simplicity.

With stocks at new highs, the VIX is ever so slightly above its low from April.

Keep watching these levels closely for any signs of breakthrough (beyond 1,230 in the SPX and under 17.50 in the VIX) or reversal.

Corey Rosenbloom, CMT
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3 Responses to “Year to Date New Highs in Stocks but Not New Lows for VIX”

  1. Matt Says:

    What is your opinion on the fact that the VXX, the volatility index that is actually traded, has actually broken the April lows decisively?

  2. Today’s goodies « Vibetrader's Blog Says:

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  3. eastern Says:

    Yes that is a good question but apparently the VXX does not correlate to the VIX so well. About 60% – 80% only. Also I think the VXX is short tern volatility and so when fear hits it may out-preform.