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Tickling the VIX



Toddo mentioned earlier that the VIX is up today, despite the green seas in the broader market averages. This is, indeed, a relatively rare occurrence.

Since 1986, when the S&P 100 has been up between 1.0% and 1.2% (I show it being up 1.1% today), the VIX has declined on the day more than 80% of the time. Phrased another way, there's only a 20% chance of us seeing what we're seeing today as far as the VIX goes (assuming it closes where it's at now). Since 2000, it becomes even more rare, as there has been only a 13% chance of seeing the VIX up at the same time the S&P is up this amount.

So, what does it mean going forward? Unfortunately, it doesn't seem like much. Since 1986, the return 1, 3 and 5 days after such occurrences, the S&P has turned in no better or no worse performance than a random period. However, since 2000, when we see such situations as this (both the VIX and S&P being higher), the market has underperformed a random return 3 and 5 days later by a small margin. We don't have enough occasions to consider this statistically significant, but I thought you'd like to know.

Statistics can only get us so far, and just give us some background. They describe the past, and not necessarily the future - so although there does not seem to be any edge for us in the fact that the VIX is up today, it still sticks out as being unusual, and I try to always pay attention to something that's not doing what it "should." The way I look at it, at its core the VIX is a measure of supply and demand. When there is demand for OEX puts (which the VIX is based on), the VIX rises since the market makers can get away with it. And, as I alluded to yesterday, OEX traders tend to be better at market timing than equity option traders.

My take? OEX traders continue to push heavily against this market, and that will either create demand should we continue higher (as they cover their short positions) or their speculations will pay off and we will head lower over the coming weeks. Historical precedent suggests the latter is more likely than the former, but in recent weeks historical precedent hasn't meant much at all.

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