The Message of VIX

By: William “Bill” Speth, Chief Research Officer

The Cboe Volatility Index (VIX) is considered by many to be an indicator of broad market risk and investor sentiment. It has been dubbed the market’s “fear gauge” because of its tendency to rise when the market falls and vice-versa. Since 1993, the VIX Index has exhibited a strong negative correlation to stock market returns but over short periods VIX can act very differently – and that behavior can serve as a sign of a possible market turn.

Over the past three weeks, VIX has risen more than 20%, from 15.01 on Oct. 21to over 18 on Nov. 10. Over the same period, the S&P 500 also advanced, even hitting an all-time high on Nov 8. Six times during the past month, VIX has advanced as stocks rallied, a pattern that has occurred only two times since2017 and 2018.

We saw the so-called “VIX up/stocks up” scenario in the weeks leading up to“Volmageddon” in Feb. 2018 and again before the pandemic-related meltdown in March 2020.

In both cases, VIX and other options indicators signaled growing demand for market protection, even as stock prices were making new highs. While there’s no guarantee that the recent VIX behavior will result in a similar decline, we believe that investors should be aware of the risks signaled by VIX’s unusual behavior.

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