At the end of the week last Friday the SPX had reached a recent low, dipping below 1100 for the first time since December 17th. Almost a month, the market was also off just over 5% in a matter of days. Not coincidentally, the VIX also increased jumping almost 10 full points in, an increase of almost 58%. The following week the SPX actually dropped another 18 points, yet the VIX was off by almost 3 points to 24.55. I stated on Friday the 22nd that the market had overreacted. I made the case that based on the price of the SPX (1090), and the VIX, the market was implying a move of over 85 pts. The common investor would say that I proved my point because the VIX was lower by week’s end. I would reply yes, BUT, implied volatilities were actually off FAR more than the 2.76 point that the VIX had fallen. How do I know this? Simple, the price of the SPX!
Let us do some quick math; with the SPX at 1090 the VIX was implying an 85 point move using a 30 day standard deviation calculation. In order for the SPX to continue to imply a move of 85 points the VIX would have had to be 27.79 almost .5 point higher. To continue to move at an equal percentage the VIX would have had to hold at 27.31. With the VIX at 24.55 AND the SPX down 18 handles, the market is saying that implied volatilities are WAY down. The VIX was implying that the move over the next 30 days will be about 74 points, a full 9% less than the previous Friday. This is actually somewhat predictive of what happened today. If we look at periods of time when the VIX is down and the SPX is down at the same time, these tend to give heed to an upcoming rally.
As for today, the market is acting like it wants to keep this rally going, if one was a bear the 3 point rally into the close would not be a positive sign. I am going to be looking to do a short term butterfly in the SPX tomorrow I think. FYI on Friday January 22nd we were at almost the same price SPX level as we closed today, but the VIX is almost 5 bucks lower.
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