Anomalous Behavior
Let me know what you think
Let’s not bury the lede. The volatility “complex” has been misbehaving recently. Quick review. When stocks go up (bullish) it is normal to see implied volatility (VIX) to go down and vice versa. Using the VIX futures and SVIX as a proxy for being short the futures, we expect SVIX to generally move in the same direction as SPX (stocks up and vol down = gain for short vol). As shown in the table below, the past few weeks has been off-script more than we would expect. I will report a more complete crunching of the historical numbers in the weekend post. But Jim! What does it mean? Let’s assume that this variation from the norm is statistically significant. My conclusion would be that this market can’t be trusted and we should be extra vigilant for more serious misbehavior. Please tell me what you think in the comments.
Meanwhile, the VIX Mix continued its climb yesterday tacking on an additional three points and pushing closer to full-on bull mode. 13 of 17 components are bullish and nine of the 13 sit above the 80% threshold.
That makes six green bars in a row and takes our trend measure up close to 70%.
Looks like full steam ahead except for that damn table at the top of the post. We’ll dig deeper over the weekend and you’ll be the first to see the results.
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The Tier1 Alpha morning note expresses a more sanguine view:
vol up, spot up tends to get a lot of attention. However, it’s important to note that this is actually a very common dynamic, given that around 1/3 of all record highs in the SPX since 1993 have occurred alongside a rising VIX. In other words, it’s not especially rare, nor is it typically a sign of impending doom.
Instead, it often comes down to either new strikes entering the VIX calculation on the call side, or the vol surface recentering around the higher SPX level. In yesterday’s case, it was the latter, with the vol surface genuinely repricing higher around the new SPX level and more than offsetting the usual decline in VIX that comes with higher spot.
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