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Executive summary:

  • The historical relationship between the SPDR S&P 500 ETF, or SPY, and the Chicago Board Options Exchange Volatility Index, or VIX, is more nuanced than one might anticipate.
  • Counterintuitively, there was a positive correlation between SPY and VIX during the 20th century. Meanwhile, there has been a negative one between them during the 21st century.
  • Given the equity market's increased volatility year to date from 2013 to 2014, it may be profitable to consider the implications of the nuances in the SPY-VIX relationship.
  • One way I carry out this work is by comparing and contrasting the conditions of MySPY and MyVIX, which represent the daily pivot points of the two relevant data series.

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If one were to cast creatures of the contemporary financial markets as the title characters in a Bizarro World film version of Robert Louis Stevenson's Strange Case of Dr. Jekyll and Mr. Hyde, then one could do worse than choosing the SPDR S&P 500 ETF (SPY) for the former role and the Chicago Board Options Exchange, or CBOE, Volatility Index (VIX) for the latter one.

One way I like to evaluate the ever-mutating long-term relationship of this odd couple since its origins more than 21 years ago is by employing as metrics MySPY and MyVIX, which represent the daily pivot points of the two relevant data series. I use as computational sources the open, high, low and close, or OHLC, data sets at the online sites of Yahoo Finance and CBOE, in that order.

Figure 1: Long Term, MySPY And MyVIX Appear Uncorrelated

(click to enlarge)

Source: This chart is based on OHLC pivot points calculated using daily SPY data at Yahoo Finance and daily VIX data at CBOE's online site.

Appearances can be deceiving, however. The correlation coefficient between MySPY and MyVIX may have been 0.03 over the entirety of their relationship, but both are less likely to oscillate and more likely to trend over time. Accordingly, there have been some long periods when there has been a pretty strong positive correlation between the two data series and other long periods when there has been a pretty strong negative correlation between them.

Figure 2: MySPY, MyVIX Positively Correlated In 20th Century

(click to enlarge)

Source: This chart is based on OHLC pivot points calculated using daily SPY data at Yahoo Finance and daily VIX data at CBOE's online site.

With apologies to Julius Caesar, I note all of the MySPY-MyVIX relationship in the 20th century is divided into three parts. During the first, they both trended sideways. During the second, they both trended upward. During the third, they diverged, as MySPY trended upward and MyVIX trended sideways. In the context of their relationship, I find anomalous the period between 1993 and 1997, inclusive: I do not expect to see its like again, unless Tim Berners-Lee has another World Wide Web in his bag of tricks.

Figure 3: MySPY, MyVIX Negatively Correlated In 21st Century

(click to enlarge)

Source: This chart is based on OHLC pivot points calculated using daily SPY data at Yahoo Finance and daily VIX data at CBOE's online site.

This art comes close to the image in my mind's eye whenever I visualize what I believe to be the logical inverse relationship between MySPY and MyVIX. One goes up, the other goes down. And vice versa. Except for the three associated stock-market bubbles (and the bursting of two of them), it is a beautiful thing in the mechanical universe.

Figure 4: Inverse Relationship Strengthens Since Devil's Bottom

(click to enlarge)

Source: This chart is based on OHLC pivot points calculated using daily SPY data at Yahoo Finance and daily VIX data at CBOE's online site.

The inverse relationship between MySPY and MyVIX has strengthened since the S&P 500 hit the Devil's Bottom of 666.79 intraday on March 6, 2009, when the world changed forever. Again. In association with the same market event, MySPY reached a low of $68.45 on March 9 and MyVIX reached a high of 51.21 on March 3.

Figure 5: MySPY And MyVIX During The Last Bull Market

(click to enlarge)

Source: This chart is based on OHLC pivot points calculated using daily SPY data at Yahoo Finance and daily VIX data at CBOE's online site.

The strong negative correlation between MySPY and MyVIX during the S&P 500's last bull market was generally consistent with the norms of the relationship in the 21st century.

Figure 6: MySPY And MyVIX During The Last Bear Market

(click to enlarge)

Source: This chart is based on OHLC pivot points calculated using daily SPY data at Yahoo Finance and daily VIX data at CBOE's online site.

The strong negative correlation between MySPY and MyVIX during the S&P 500's last bear market also was generally consistent with the norms of the relationship in this century.

Figure 7: MySPY And MyVIX During The Current Bull Market

(click to enlarge)

Source: This chart is based on OHLC pivot points calculated using daily SPY data at Yahoo Finance and daily VIX data at CBOE's online site.

At first glance, the negative correlation between MySPY and MyVIX during the S&P 500's current bull market appears generally consistent with the norms of the relationship in this century. However, a closer look at the data indicates the development of a divergence during this period. The MySPY-MyVIX correlation coefficients are -0.91 for the time from Oct. 4, 2011, to Dec. 31, 2012, and -0.02 for the time from Jan. 2, 2013, to Feb. 28, 2014. Nuances, indeed.

Figure 8: MyVIX In January-February, 2013 Versus 2014

(click to enlarge)

Source: This chart is based on OHLC pivot points calculated using daily SPY data at Yahoo Finance and daily VIX data at CBOE's online site.

Market volatility advanced on a comparable basis in the first two months of 2014 versus 2013. During the first 40 trading days, the MyVIX median climbed to 14.29 this year from 13.44 last year, its mean rose to 14.85 from 13.80 and its standard deviation widened to 2.16 from 1.05. And, of course, the geopolitical situation involving Russia and Ukraine likely will contribute to a spike in volatility in early March, although this effect could fade quickly should a diplomatic solution to their problem be reached in short order.

Figure 9: MySPY And MyVIX In January-February 2013

(click to enlarge)

Source: This chart is based on OHLC pivot points calculated using daily SPY data at Yahoo Finance and daily VIX data at CBOE's online site.

MySPY trended upward during the first 40 trading days last year, while MyVIX trended sideways over the same period. This divergence in the customary inverse relationship between the two variables in this century appeared anomalous and therefore unlikely to be sustainable.

Figure 10: MySPY And MyVIX In January-February 2014

(click to enlarge)

Source: This chart is based on OHLC pivot points calculated using daily SPY data at Yahoo Finance and daily VIX data at CBOE's online site.

The inverse relationship between MySPY and MyVIX appeared to be in evidence during the first 40 trading days this year. One moved up, the other moved down. And vice versa.

The Bottom Lines

Equity-market volatility in January and February was higher this year than it was last year. March and April are seasonally strong months for the stock market, so volatility may not constitute a drag for it during this period. However, I believe:

  • MyVIX attained a long-term low of 11.45 on March 14 of last year.
  • MySPY may hit a long-term high by July 1 of this year, as indicated in "NYSE Margin Debt Hits Record $444.93 Billion In December: Risk Rank At No. 1."
  • The U.S. Federal Reserve's moves to tighter from looser monetary policies historically have created headwinds for the equity market, as suggested in "Building A Martin Zweig-Like Fed Indicator Integrating Innovations Of The 21st Century."
  • A change in the Fed's leadership is associated with a below-average advance in the stock market and above-average volatility in it during the trading year subsequent to the transition, as noted in "The Dow And The Federal Reserve's Transitions."

Accordingly, I will be especially attentive the rest of this year while watching the twists and turns in the Jekyll-and-Hyde relationship between MySPY and MyVIX as they are shown on my intracranial screen as scenes in a thriller of a movie, on or off the Bizarro World.

Disclaimer: The opinions expressed herein by the author do not constitute an investment recommendation, and they are unsuitable for employment in the making of investment decisions. The opinions expressed herein address only certain aspects of potential investment in any securities and cannot substitute for comprehensive investment analysis. The opinions expressed herein are based on an incomplete set of information, illustrative in nature, and limited in scope. In addition, the opinions expressed herein reflect the author's best judgment as of the date of publication, and they are subject to change without notice.

Source: S&P 500 Flattish As VIX Rises In 2014