What 'VIX Sensitivity' is Telling Us

It appears the VIX isn't being driven by panic -- and that's good for the stock market

Jan 20, 2016 at 10:07 AM
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As I try to get back in the volatility flow, I notice something a bit odd on the surface. The CBOE Volatility Index (VIX) has trended less sensitive to SPDR S&P 500 ETF Trust (SPY) moves in recent days.

Volatility overall has picked up, of course. But intuitively I'd expect VIX to accelerate on a relative basis as the market gets scarier. Yet, that's not what we've seen.

I measure this by taking a lagging 20-day "best fit" line estimate of the relationship of one-day SPY moves to one-day VIX moves. I then multiply it by negative 1, since VIX and SPY have a negative relationship and I'm really looking for magnitude. And more importantly, I want "up" on the chart to mean "more sensitive."

My theory is the higher the number -- I'll call it "VIX Sensitivity" -- the more panic in the air, and the more likely it's a contra tell. The reality? Well, here's how it looks over time:


Over the course of SPY history, the 20-day "best fit" line averages 5.10. Right now it sits at 6.08. So it's historically high. But as you can see, the relationship has trended generally higher over time. In the last decade, it averages 6.25. Thus, VIX is slightly non-sensitive to SPY in the here and now. That wouldn't be noteworthy, except for the fact that we're in a generally ugly market.

Where's the fear? And should we worry about the lack of worry in this backdrop?

Over forever? No. There's a tiny correlation of 0.0213 between "VIX Sensitivity" and one-month forward returns in SPY.

But in specific situations, we see some interesting results. In 2007, the relative calm before the Bear Stearns-Lehman storm, the correlation of "VIX Sensitivity" to one-month forward returns hit 0.29. That's not gigantic, but it's something. And it's intuitive. Sensitivity spikes were relatively good times to get long.

That was not the case in 2000, however. The correlation was 0.04. So no real warning whatsoever.

And now? From the start of 2015 to the end of last week, the correlation was negative 0.49.  

Yes, it's a relatively strong relationship and it's a negative one. The more panic-driven the VIX gets, the worse the market does. VIX has actually become "smart!" By that I mean, in this relatively narrow window, it has become a leading tell, not a contra tell.

I'm not saying VIX will stay this way. In fact, it goes against much of what I believe in. But I have to acknowledge that right here, right now, VIX is "smart." And in that context, the relatively unfearful VIX we see is actually a positive for the markets.

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


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