The Relationship of the SPX and the VIX Index
When the S&P changes in value, how does the VIX tend to We've received numerous emails asking about the relationship between the SPX and the VIX. Since we are often short Implied Volatility (IV) it is obviously. This chart is a typical example of how the S&P and VIX move relative to each VIX moved in the opposite direction of the S&P about 80% of the time. When the normally inverse correlation between the VIX Index and the Just call up a chart of $SPX, choose as your indicator “Correlation”.
There are other more suitable tools for analyzing the strength of relationships between two contemporaneous time series.
Tom McClellan:Correlation Between VIX and SP | Top Advisors Corner | victoryawards.us
But they are a whole lot harder to use and to program, and so a lot of technicians just use what is easier. And sometimes what is easier can sometimes be good enough. The chart of the day correlation between VIX and SP is good enough to tell us when there is a moment of strange behavior between the two data sets.
And those moments of strange behavior just happen to be pretty good at marking tops for stock prices. The higher that the Correlation Coefficient goes, especially when it gets above zero, the more important the message.
And that usually means a more significant the price top. But meaningful tops can be found when the Correlation Coefficient gets up to a level shy of the zero line. Ten days seems like a good period for this purpose, but others may work as well. Darshan Dorsey asserts that a day correlation coefficient works even better.
On June 7,the day correlation went up as far as That was not quite to zero, but big price tops have been found on lesser readings. If you look at the day rolling correlation, you quickly see that there is typically a reading between Yet, it is not always that way. Infrequently, we see the connection move into positive territory - usually amid a strong surge in volatility or charge in underlying shares.
Yet, where we stand today is at a far greater extreme. That alone would make this seem far less consequential if not for the fact, that we don't have another comparable reading until all the way back to December 31st, In fact, in the past two decades, there are only four other times that we've seen this orientation at this intensity. That would clearly suggest something is amiss.
It is tempting to say that this is a signal for something more ominous and formidable. Given the relentless climb in capital markets over the years and the skepticism that has grown out of the complacency, there is a natural interest in looking for signs that 'the end is near'.
I personally believe that markets are oversaturated with risk and that there is far more to lose than gain in adding or even holding exposure. That said, picking tops is an effort fraught with too many false starts as rational analysis does not fit irrational risk chasing.
Nevertheless, this relationship flip is remarkable. It reflects upon the over-indulgence in equities. It also reflects in the securitization of volatility products which has drawn fantastic interest from those that are hoping to find in abundance what they have so lacked through the market: What has resulted is the same debase, short-term speculative stretch that you get in everything else.
And, the fact that there is a zero bound in volatility doesn't seem to dissuade exceptional exposure.
Why should we take note of this market relationship? How much of a proactive signal does it offer? Where and how should we trade should markets indeed heed the warning?
We discuss all of that in today's Quick Take Video.