The VIX volatility index has long been used to gauge the market risk-on/off sentiment. There is a strong linear relationship between both series: changes in VIX are negatively correlated to SP 500 returns. However, there is a shortcoming: the series are coinciding. Spot VIX is not forward looking, but directional.
We can use the Gold/Oil ratio (GOR) as an alternative gauge of risk aversion. The chart below shows that GOR and VIX used to send the same message but they have recently disconnected. GOR and the VIX curve (6M-1M) have also disconnected.
Interestingly enough, the VIX slope has recently disconnected from the SP 500 (there is no link between the VIX slope and the SP 500 futures curve) pointing to an SP 500 at 1300 levels. The 3-month change analysis confirms this view. From a technical analysis point of view, it would bring the SP 500 back to its long run support and its 23.6% retracement level since the 09 rebound.
What about the gold/oil ratio? It has emerged as a comprehensive measure of risk aversion over the past few years, even though some oil-idiosyncratic factors might temporarily skew the message. As can be seen in the chart below, the change in GOR suggests much lower SP500 returns ahead.
There are two winners and a loser. Forget about Spot VIX and focus on GOR and the slope of VIX futures. Both series point to lower equity returns. Caution required.