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Is the Fear Subsiding?

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.

Posted in Derivatives, Markets.

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