The following
chart displays the movement of the S&P 500 index vs. the VIX from the
beginning of 2013 through 6/19/2013.
+Reacted+with+Events+(Illustrated+by+Examples)+chart1.png)
The blue line indicates that the S&P 500 trended up vigorously
from the first day of 2013 until mid-June 2013. The red line represents the VIX
reading which went trended downward steadily.
A green line was drawn between the VIX and S&P 500 index. Basically, the S&P 500 and the VIX went
in opposite directions and formed a wedge shape. Chart 4.1 revealed that the S&P 500 was
nearly symmetrical with the VIX in terms of direction, shape, and magnitude
during this time period.
When the market pulled back, the VIX rose spontaneously. Likewise,
when the market moved up, the VIX drifted lower. The VIX reacted with spikes when the market
moved down abruptly. Otherwise, when the market moved up steadily, the VIX
stayed in a depressed level and the reading shrank day by day.
The spikes of the VIX often
corresponded with unexpected events or economic factors. On 2/25/2013, the S&P dropped 27 points,
roughly 1.8%. An election in Italy and a subsequent UK downgrade was primarily
responsible. The VIX ran up from 14.2 to
19 with a 34% increase.
On 4/15/2013, the S&P
500 dropped 36 points, with a level not seen since last November. Quite a few unexpected events occurred on
that day. There was the Boston Marathon explosion, China missed its GDP expectation,
home builder sentiment fell for the 3rd month, and gold futures dropped 10% as
well. The VIX skyrocketed 43%. This
level is not often seen in a bull market.
The percentage surge in the VIX at 43%, according to the interpretation
from table 4.2, is equivalent to about 12% of expected monthly volatility, and
2.7% of expected daily volatility in the next 30 days.
Here is another example. On 4/17/2013, Bank of America
missed its earning expectation, Apple stock lost a value of 5.5%, and the Fed’s
beige book incurred the QE ending speculation.
The S&P lost 23 points, and the VIX had another minor spike at 18%
due to the above combined factors.
However, the better-than-expected earnings from Google, Microsoft, and
IBM encouraged investors to reenter the market.
Moreover, the next day on 4/22/2013, G-20 turned on the green light for
Japan’s QE. Then the market shrugged off the negative sentiment further, and
made a turn-around. Since the VIX
sentiment went extremely bearish, the market recovered steadily since then until
5/21/2013.
When Mr. Bernanke issued his customary testimony in front of Congress,
on 5/22/2013, he said premature tightening could stall recovery. On the other
hand, FOMC minutes indicated that some members expressed a willingness to slow
asset purchases as early as June. This
piece of information cooled down the rally mood, and caused the VIX to recover
from the bottom, due to fear of earlier implementation of stimulus
tapering. Then the market experienced a
10-day correction, which was the severest one since November last year!
The CBOE Volatility Index (VIX), a gauge of anxiety on Wall Street,
jumped 23% on 6/20/2013 to 20.49, the first time this year it closed above
20! It occurred the day after the
Federal Open Market Committee hinted that the economic stimulus tapering would
come sooner than expected.
These
events that caused market fluctuation occurred between 1/2/2013 and 6/19/2013.
The VIX reflected this fluctuation. Even
if a lot of noise appeared in chart 4.1, you can still detect that the VIX
responded adversely with the S&P 500 movement most of time.
Thanks for your reading, if you want to know more about volatility
index (VIX), you can read more:
Have a great day!
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