With the equity markets down over 2% intra-day as the participants realized Friday’s European Summit did not provide a silver bullet to the Eurozone problems, you might expect the VIX to skyrocket. In reality, the S&P ended the day down 1.5% and the VIX ended down 2.65%.
We can look at the last few months of range bound trading to compare the absolute levels of the two indices:
- It is difficult to dissect the sawtooth market action
At the end of October the VIX traded near the 25 level while the S&P was trading at about 1275. At the beginning of December we saw the S&P trading at about 1260 while the VIX was at 25. It is also important to note that the VIX climbed through last week even as the S&P traded in a tight range. In the past wee, we have watched the S&P fall from1260 to 1230 while the VIX tumbled from 31 to 25.67…
This observation of decoupling can be better shown by looking at the correlation between the VIX and the S&P 500 over the last few months. From the beginning of August through the mid portion of November we saw a very strong negative correlation between the S&P 500 and the VIX. Since then, there has been a significant decoupling between the two on a rolling basis:
Decoupling of the VIX?
This could be viewed as the lifting of a worry cloud, but I more likely attribute it to the fact that we are heading into the end of 2011 and light holiday trading. Most traders and banks are relaying an expectation of a holiday rally with a return of the crisis in the early part of 2012.
