Much has been made in the blogosphere about the lack of a rally in the VIX despite the fact that SPX is 100 points below its September QE3-induced high. For example, see this blog post from the OptionsPit blog, opining that the SPX is close to a low because the VIX is not going up as the SPX index goes down.
Before I offer my opinion, let’s look at a chart of VIX vs. SPX over the last 3 years:
I’ve circled in black each instance where the SPX sold off 100 points from an intermediate high. If you count the massive ups and downs during the fall of 2011 as one instance, it really has happened just 5 times in the past 3 years: 1) flash crash of 2010 and subsequent weakness, 2) mini-selloff in June 2011, 3) August 2011 mini-crash, 4) May-June 2012 selloff, and 5) current selloff.
The action in the VIX shows that this is the only selloff that has not seen the VIX jump above 20 (and in most cases, the VIX jumped far above 20). In that sense, the current selloff most resembles the June 2011 selloff, where the SPX sold off from 1370 to 1260 over a couple months, with one final move to the 200-day moving average.
BUT, there are several major differences between that selloff and the current move. The current move is being led lower by the Nasdaq and the Russell 2000, both of which have already convincingly broken their 200 day moving averages. In addition, global stock markets are all much lower, and overall breadth measures are weaker as well.
The lack of a rally in VIX despite SPX weakness has been surprising. But I don’t think it’s an all clear signal by any means. I bought the VIX call spread last week because I am of the view that the VIX’s weakness is a function of investors taking off protection as the market has moved lower, leaving them exposed to one last capitulation move over the next 2 weeks. At a cost of 80 cents for a 5 dollar wide spread, I’ll take that trade when the market’s in such a unique position.