Tuesday, December 13, 2011

What Happens After Both the VIX and the S&P Decline on the Same Day? (VXX; VIX; SPX; SPY)

From Sentiment's Edge:
VIX And S&P Sitting In A Tree…
There was an unusual development yesterday, as the S&P futures lost more than -1.5%, and yet the VIX “fear gauge” fell by more than -2%.

Usually the two move in opposite directions, especially on a big down day.  On days when the S&P lost more than -1.5%, the VIX rose 95% of the time.

The knee-jerk interpretation of this is that traders are overly optimistic – after all, they’re estimating future volatility will decline even after a big up day.  That may happen, but it’s not how they usually react.
There are other reasons the VIX may have declined, such as the looming options expiration on Friday, seasonal influences as we approach year-end, and even the myriad volatility products that are now available....MORE

 HT: Abnormal Returns who also spotlights Dynamic Hedge.