Subtle signals from the VIX

The Cboe Volatility Index (VIX) usually makes news when stocks are selling off, but longtime traders know the VIX can be useful even during more mundane times, such as when the market is mostly grinding higher.

That describes the market for much of this year. Most recently, the S&P 500 (SPX) has rallied as much as 6.6% since November 4. As of Wednesday, that gain was still nearly 3% despite the SPX’s sharp sell-off after the Fed’s interest rate announcement. At the same time, the VIX retreated from above 23 in early November to below 13 in early December before jumping above 25 yesterday:

Overall, this is what most traders would expect—a falling VIX when the stock market rises, and a rising VIX when the market pulls back, as it did in mid-November and this week.

The inverted relationship between the SPX and the VIX also played out on a day-to-day basis. There were 51 trading days from October 8-December 18, and the SPX closed higher on 30 and lower on 21. The VIX closed lower on 25 of the up days and higher on 15 of the down days (and was unchanged on one other).

What is interesting is what happened when the VIX didn’t move in the opposite direction of the SPX—specifically, the five days the SPX and VIX both closed higher, which are highlighted on the chart. Three of those days (November 11, December 4, and December 16) were followed by at least one day of down movement in the SPX, and two of them were followed by the biggest pullbacks of the past 90 days.

When the VIX closes higher on an SPX up day, it can mean the options market (which forms the basis of the VIX) sees the potential for increased volatility—and that, when the market has pushed to a new high, can translate into a down move in the SPX. It’s notable that the two SPX-VIX up days that weren’t followed by at least one down day for the SPX (November 19 and 20) occurred when the stock index was not making at least a one-week high.

While not all of the SPX declines after these VIX signals were immediate, they did precede some of the rare moments of weakness in an otherwise strong up move—which helps explain why many traders pay attention when the VIX doesn’t do what it’s “supposed” to do.

Market Mover Update: February WTI crude oil futures (CLG5) fell for a third-straight day on  Wednesday. If the market loses ground for the week, it will be the 10th-consecutive week the market has reversed direction (see “Oil slump tests energy sector”).

Today’s numbers include (all times ET): final Q3 GDP (8:30 a.m.), weekly jobless claims (8:30 a.m.), Philadelphia Fed Manufacturing Index (8:30 a.m.), Existing Home Sales (10 a.m.), Leading Economic Indicators Index (10 a.m.), EIA Natural Gas Report (10:30 a.m.).

Today’s earnings include: Accenture (ACN), Conagra (CAG), Cintas (CTAS), Darden Restaurants (DRI), CarMax (KMX), Paychex (PAYX), FedEx (FDX), Nike (NKE).

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