Something strange is going on in the markets. I know Halloween has just passed but no, it has nothing to do with any paranormal activities. It is typical that the Cboe Volatility Index $Cboe Volatility Index(VIX)$ trades inversely with the stock market, however, on Friday, I noticed the US stock market (Dow, S&P500, Nasdaq) closed in the green while the VIX surged higher. In fact, the VIX closed at $16.48 or 6.74% higher. That is unusual.
The VIX is known as the market’s fear gauge. Basically the market prices of S&P 500 put and call options are used to calculate the market’s expected volatility in a 30-day time frame. With the VIX surging up, this could reflect that investors want to protect their portfolio and therefore they drive up the prices of put options, resulting in the increase of the VIX. Conversely, if the market rises, the demand for put options are lesser, resulting in the decline of the VIX.
It is reasonable to imply that with both the VIX and S&P 500 $S&P 500(.SPX)$ moving in the same direction, a reversal could be on the horizon as the market rally appears unconvincing. The market rally can be said to be real and convincing when the VIX declines along as the market climbs higher (by the way, you can look at S&P 500 vs VIX charts that prove this point). Oh It is also worth mentioning that options trading tend to pick up speed at the end of the year which could also explain the strange moves in the VIX.
As the VIX swell suggests, err on the side of caution is not a bad decision.
Tigers, would you agree the VIX is a good indicator of a buy or correction signal? Would like to hear your thoughts. @Tiger Stars
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