Schaeffer's Outside the Box Blog
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The market has dropped more than 5% since the Nov. 6 close. That's not a crash, but it's pretty ugly and relentless nonetheless. Meanwhile, the CBOE Market Volatility Index (VIX) has gained roughly 6%, probably about a third or a quarter of the move one would normally expect against the market backdrop.

It's nowhere near overbought or indicative of a buy in the market -- at least if you subscribe to the theory that VIX is a contra-tell. The VIX is about 4% above its 10-day simple moving average, nowhere near its top Bollinger Band, and trading in the mid-teens. This is simply not high on an absolute basis.

The VIX isn't a perfect inverse to the market as it quantifies implied volatility, so this behavior would be normal in slow-drip sort of selloff. But that's not really the case here. 10-day realized volatility in the S&P 500 Index (SPX) has ticked up over the last seven trading days from 11.8 to as high as 16.

So … what's going on?

My best guess is we have a lot of moving parts here. The selloff started after Nov. 6, so it makes sense to use that date as a starting point to highlight the weak VIX. But any time you just start an observation on a random date, you run the risk of a sort of selection bias.

A guy trying to sell you his sports handicapping newsletter will always brag about how seven of his last eight picks were winners. But you can surmise that means he lost his pick right before that, otherwise he'd tell you he was up eight of his last nine. You can also probably guess his 10 picks before that had mediocre to lousy results, otherwise he'd go even farther back.

I can play the same game with VIX. If I go back to Oct. 23, the market is down 4% while the VIX is roughly unchanged. That sounds way less impressive (or less unimpressive), especially since the election occurred right smack in the middle of that arbitrary timeframe.

And in fact, that highlights a potential cause of the current VIX underperformance. Options were probably bid modestly higher ahead of the uncertainty of the election. So perhaps the VIX was a bit high into Nov. 6 and the expected drop in options was merely offset by the drop in stocks themselves.

Let's also remember VIX rolled out in the middle of this, and that knocked the reading down a couple pegs as well.

And finally, we do have Thanksgiving coming up. Holiday weeks are notorious volatility killers. Market ugliness generally overwhelms fear of paying a few needless days of options decay, but not always.

Those are my best guesses as to why the VIX is acting kind of like a punk here. But however you slice it, there's not much fear apparent after a decent market selloff, so I'm loathe to fade this move just yet.

Disclaimer: The views represented on this blog are those of the individual authors only, and do not necessarily represent the views of Schaeffer's Investment Research.


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