When the S&P500 index drops, the VIX Index pops!
The VIX Index, also known as the CBOE Volatility Index, is a measure of the implied volatility of the S&P 500 index. The S&P 500 is an index that tracks the performance of the 500 largest publicly traded companies in the US.
The VIX and S&P 500 have an inverse relationship, which means that when the VIX goes up, the S&P 500 generally goes down, and vice versa. This is because when investors are worried about the future performance of the stock market, they tend to buy options that protect against losses, which drives up the demand for options and increases the VIX. As a result, the S&P 500 tends to go down when the VIX goes up.
When investors are optimistic about the future performance of the stock market, they tend to sell options, which drives down the demand for options and decreases the VIX. As a result, the S&P 500 tends to go up when the VIX goes down.
It’s important to note that correlation does not imply causality, there are multiple factors that influence the stock market and the VIX, such as the economic indicators, monetary policies and the geopolitical events, among others. Additionally, the relationship between the VIX and the S&P 500 is not always linear and can change over time.
S&P500 (SPX) vs. VIX Index Chart
The chart below illustrates the historical correlation between the S&P 500 Index (SPX) and the VIX Index, displayed on a weekly time frame dating back to 2010.
To enhance the visibility of the percentage variations, the scale of the SPX is presented in logarithmic format. This allows for a more accurate representation of the changes in the index, especially when there are large fluctuations.
It’s important to note that the chart only represents the past relationship of the indices and doesn’t guarantee future performance.
VIX Index observations
It’s important to observe the following points when analyzing the VIX Index:
- The VIX Index tends to spike when the S&P 500 falls, as investors tend to buy put options that protect against losses when they are worried about the future performance of the stock market, which drives up the demand for options and increases the VIX.
- The VIX Index has a mean-reverting nature, which means that it tends to return to its long-term moving average over time. This means that after a spike in volatility, it is likely that the VIX will decrease over time and return to its long-term average.
- The VIX Index tends to make spike tops and rounded bottoms. This means that when the VIX spikes, the peak is often sharp and sudden, followed by a gradual decrease. This pattern can be observed in the historical data of the VIX.
S&P500 (SPX) and VIX Index Correlation Chart
The chart provided illustrates the historical negative correlation between the daily percentage changes of the S&P 500 (SPX) and the point changes of the VIX Index over a rolling window of 252 trading days (approximately one year). This means that when the S&P 500 decreases, the VIX tends to increase and vice versa.
Source: https://www.macroption.com
It’s important to notice that for the entire available history (1990 – 2022), the average statistical correlation between the daily percentage changes of the S&P 500 (SPX) and the VIX index has been -0.70. This indicates that there is a strong negative correlation between the two indices, which is in line with the general observation that the VIX tends to increase when the S&P 500 decreases.
However, it’s worth noting that the relationship between the VIX and S&P 500 has changed throughout the years, with the correlation fluctuating over time. Since ca. 1998, the correlation has oscillated around the -0.80 level, meaning that the relationship between the two indices has become stronger and more consistent over time.
It’s important to keep in mind that the relationship between the VIX and the S&P 500 is not always linear and can change over time and there are multiple factors that influence the stock market and the VIX, such as the economic indicators, monetary policies and the geopolitical events, among others.