Wednesday, 3 October 2012

VIX and S&P 500 - the calm before the storm?

That there is co-movement between the two is fairly apparent. Which leads which is a bit more difficult to answer though. It is pretty clear however in the chart that the volatility of the VIX index increased significantly, indicated by the chart heading downwards (as the figures are the inverse of those reported), prior to the S&P 500 in the run-up to the financial crisis. Also worth noting is that the volatility of the VIX was very low (an inverse value of around 0.100) prior to the increase in volatility in the run-up to the financial crisis.

Volatility of the VIX index averaged 0.067 during the last fourteen days, the lowest level since around June 2007. Could this be the calm before the storm? It could be, but it is perhaps even more likely to be exactly that if it moves closer to 0.100 so perhaps the calm could last a little bit longer. Based on earnings the S&P 500 index is not expensive in a historical perspective (see here), but the debt and the deficit in the U.S. (see here) and unprecedented money printing by the Fed (see here) cast a big, dark shadow over the stock market.




 

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