Why VIX Is Getting More Responsive to SPY

VIX is getting more responsive to SPY's moves, just as it did ahead of the market's mini-meltdown in August

Nov 30, 2015 at 9:01 AM
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Welcome back! Hope everybody enjoyed their turkey/football/shopping over the weekend.

There’s no vacation for the CBOE Volatility Index (VIX)! Well, maybe a little vacation. They still calculate VIX so long as the market remains open; it just doesn’t tend to do much.

Thanksgiving week was no exception to the general holiday malaise. I generally expect VIX to underperform vs. expectations a bit, thanks to the effect of time decay on options prices in quiet times. But that wasn’t really the case, though more because essentially nothing happened net-net.

The SPDR S&P 500 ETF Trust (SPY) rallied a whopping 0.25 on the week. VIX dropped an even whopping-er 0.35 ... so, I guess it did actually underperform by a tiny amount. It "should" have only dropped by 0.04 or so. We'll call that extra 0.31 the holiday effect. But it's really a rounding error and best ignored. VIX will likely make back its "underperformance" by the first tick today.

Oddly enough, VIX is actually trending towards more responsive to every SPY tick. Here’s a look at the lagging "best fit" 20-day ratio of VIX moves to SPY moves.

Warner 1130 2

Remember, it's a negative relationship; thus, as less continues to happen market-wise, VIX is getting more and more responsive to every little SPY tick In other words, it's grasping for something to do. And historically, this ratio is on the high side all year. Over the course of SPY history, the ratio is about -3.86, though in recent years it's averaged about -6.

If you want to read this bearishly, you can point to this spring. VIX started moving more strongly vs. SPY for a couple months while the market itself flatlined ahead of its August mini-melt. But more likely, it's not terribly predictive. Since Day 1 in SPY, the ratio has only a 0.014 correlation to SPY returns one month ahead. So while it's interesting to see VIX respond more to the market, it's ultimately not telling us much.

How about VIX futures? There's no particular holiday effect there. It's possible traders see something out in time while everything else is in Snoozeville.

Warner 1130 1
Chart courtesy of VIX Central

In this case, not so much. There was literally no change in the term structure last week. The Slope Remains the Same, and that hedge against the permanent VIX lift six months out that rarely happens remains in the On position.

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.


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