why is the VIX dropping?

If “professionals” are so good and know it all , why the redemptions in the first place ?

 

Big drops end with panic, capitulation. In the S&P we have a beautifully handy panic indicator, the VIX. When it spikes up, that indicates panic. When it goes up only grudgingly on a big drop, that’s complacency. And complacency is like dry tinder – explosive potential.

I’ve studied the relationship between the VIX and the S&P in some detail, and the thing that stands out is their incredibly consistent inverse relationship. When the S&P goes up, the VIX goes down. When the S&P goes down, the VIX goes up.

That is more true than you imagine. It is true if you look at a daily chart or a minute chart. It is true in every time frame, including tick by tick.

I’ve attached a daily chart two posts below to illustrate. ES is on top, VIX on the bottom. Check out the incredible inverse symmetry.

In the post below this I've attached a one-minute chart from the last few days of last week. Pick out any day at random and it will be just as consistently symmetrical as these are.

So while I hate to be at odds with some of the smartest people on this board, I think it’s clear that the VIX is indeed – first and foremost – a sentiment indicator. A fear/complacency index if you will.

If you go back, you’ll see that every major drop ends with a panic – with the VIX spiking up. A major drop where the VIX does NOT spike up means there is still complacency. It means the S&P is going down still further.

A good example of this is January 18 2008. I’ve highlighted it on the daily chart two posts below. That day the ES closed down for the 5th day in a row. It had dropped about 100 points in those 5 days. It had broken down to levels not seen in over 18 months.

And what was the VIX reaction? A yawn. The VIX actually closed DOWN that day.

That was incredible complacency. And it was the perfect setup for what happened the next day – the S&P spiked down 70 points.

THEN the VIX took notice. It spiked up to 37% - indicating panic, capitulation.

That of course was the bottom in the S&P.

Yesterday the ES also closed down, and so did the VIX. Does that mean we’ll have a repeat of that 70-point drop on Monday?

Not necessarily. The S&P did not break major support around 1250, and it really closed almost unchanged. The the VIX can be forgiven for dropping a bit, for “breathing a sigh of relief.”

But this is worth keeping an eye on. If the S&P continues to drop and the VIX refuses to budge – and especially if the S&P breaks major support – that means it has further down to go.

The VIX’s “heaviness” yesterday – it’s general unwillingness to go up much when the S&P went down, makes me think this drop is not over.

 

Here's the one-minute chart of the ES vs the VIX...

 

Here's the daily chart of the ES vs VIX...

 

This "heaviness" you speak of is nothing worth examining, nor is there any edge in trading it. It is nothing but synthetic time. Watch it get "heavier" as we head into the holiday weekend.

 

LOL, After coming in and catching up on the thread I was just about to say that (but in a nice way)

I guess the value of everything lies in its use to you, and value (as well as beauty) is truly in the eye of the beholder ... which reminds me, when I was walking down the street today I saw this Spanish woman who was so fine ...

 

yes that was my question exactly, wouldnt it make more sense to calculate vix based on true volatility - make vix moves up whenever the market makes a big push in either direction, and make vix moves down whenever the market becomes flat again.

 

good stuff, dmo. thanks for the research.

 

VIX was created to track the implied volatility of the OEX--to give traders a real time look at implied volatility in the most popular index options contract at that time. It has since been modified to track expected volatility of SPX.

It was never intended to be gauge of past or actual volatility (which is easy to compute without options). It indicates what the options market is pricing in for the future

 

http://www.bloomberg.com/apps/news?pid=20601213&sid=aPhyCTUG4ve4&refer=home


VIX 26% Below 2008 High Points to U.S. Stocks Drop (Update4)

By Elizabeth Stanton and Jeff Kearns

June 27 (Bloomberg) -- The most-watched gauge of price swings in U.S. equities indicates stocks have further to fall after the Dow Jones Industrial Average declined to the lowest level since September 2006.

The Chicago Board Options Exchange Volatility Index, or VIX, rose 13 percent to 23.93 yesterday, leaving it 26 percent below the 2008 high. The Dow is poised for the worst June since the Great Depression after record oil prices and credit-market writedowns sent the average to its biggest drop in three weeks.

``It could get worse,'' said Richard Weiss, who helps oversee $60 billion as chief investment officer for City National Bank in Beverly Hills, California. ``When I walk down the street and everyone who knows me says `Oh my God, how are you guys doing?' that's when it's time to start scooping up everything with both hands. We're not quite there yet.''

The volatility index, which traders sometimes use to forecast price changes in the Standard & Poor's 500 Index, closed above 30 for the first time this year on Jan. 22 after stocks retreated to a 16-month low. The VIX reached a five-year high of 32.24 on March 17 when the S&P 500 traded at its lowest level of 2008, the day after the Federal Reserve led a bailout of Bear Stearns Cos.

`Pure Measure'

The VIX is derived from the cost of options used to protect against declines in the S&P 500 and usually increases when stocks slip. Its climb above 30 in January and March marked bottoms for the benchmark index for American equities and preceded rallies of 3.3 percent and 7 percent in the following months.

``The VIX is a pure measure of risk aversion in the market which has in the past almost always shown a good negative correlation with equities,'' said Cyril Castelli, head of global macro research at Louis Capital Markets LP in London.

The Dow plunged 358.41, or 3 percent, to 11,453.42 yesterday, bringing its loss in June to 9.4 percent. The last time the 30-stock average dropped more in June was 1930, when it fell 18 percent. The S&P 500 decreased 38.82, or 2.9 percent, to 1,283.15. Financial and industrial companies led the retreat as oil rose to a record and forecasts for deeper mortgage losses threatened to extend a year-long profit slump.

U.S. stocks fell a second day on concern subprime-related writedowns at banks will worsen and record oil and a slowing economy will prolong the worst profit decline since 2002. The S&P 500 slipped 0.4 percent to 1,278.38, while the Dow lost 0.9 percent to 11,346.51. The VIX dropped 2.1 percent to 23.44.

`Tired, Old Industrials'

The Dow average has led the market lower because of the performance of its banks and drugmakers and consumer companies such as General Motors Corp., which has lost 70 percent of its value since the market reached a record on Oct. 9.

``It's a list of tired, old industrials, big financials, and non-growing drug companies,'' said Philip Roth, chief technical market analyst at Miller Tabak & Co. in New York. Financials are the S&P 500's worst-performing group this year, down 28 percent.

Companies selected for the Dow represent the ``30 leading blue-chip companies'' in the U.S., according to the Dow Jones & Co. Web site. That makes the average a good forecasting tool for the broader market, investors said.

``I consider the Dow to be the backbone of the U.S. economy,'' said Richard Russell, editor and publisher since 1958 of Dow Theory Letters, a financial markets newsletter based in La Jolla, California. ``It's not a good sign when the Dow breaks down this way.''

To contact the reporters on this story: Elizabeth Stanton in New York at estanton@bloomberg.net; Jeff Kearns in New York at jkearns3@bloomberg.net.