VIX | The effect on SPX
Updated
I would like to do some qualitative analysis on VVIX/VIX, and it's behavior/effect on markets. We will try to pinpoint some "wave types".
A. The most consistent/stable growth for SPX occurs in times of stable VIX and stable VVIX. Their ratio remains the same.
B. At times of decreasing VIX and increasing VVIX, we have an unstable, impulsive upwards wave. This occurs after a VIX peak. While everyone expects a lower VIX, as time passes markets get increasingly indecisive about the future of VIX. Therefore VVIX increases. VIX measures the sentiment of SPX, while VVIX the sentiment of VIX.
C. A period of unusually low VIX leads to speculative growth. This growth in the end, traps both the VVIX/VIX chart, and the price chart.
D. In the above waves, VVIX/VIX is either trending up or horizontally for prolonged periods. A variation from it is a period of prolonged VVIX/VIX drop. During this period, sentiment is homogenous, everyone believes that VIX will increase. A consistent belief in the VIX fate, is pushing VVIX lower. An unusually low VVIX describes a period like now, or 2008. Everyone is preparing for the drop.
Some examples will follow:
D WAVE (2008-2009)
I have highlighted two very important points during this drop.
First, the small circles. This is the point of a rapid sentiment change. Curiously, this point is many months after the FED is done with rate hikes. It is actually when it begins to drop rates.
The big circles are in a period of denial, a period during which everyone believes that the bottom is in. VVIX/VIX attempts to escape the descending channel.
B WAVE (2009-2011)
A WAVE (2012-2015)
C WAVE (2016-2018)
I find very interesting the retracements that occured after this rapid growth.
C WAVE (2020-2021)
D WAVE (2022)
Just like 2008, the shift in sentiment in September 2021 is very apparent. Likewise, now we are witnessing the period of denial.
As a final thought, what we are witnessing with the D waves is not the effect of FED, it is the effect of sentiment on it's own.
We witness the specific points of sentiment change, which don't depend (?) on the FED hike schedule. And curiously, they are in identical spots as in 2008. One before the peak, one in the point of denial.
Perhaps what everyone fears is the terminal rate. Or we fear the drop, we fear of losing. I don't know...
A. The most consistent/stable growth for SPX occurs in times of stable VIX and stable VVIX. Their ratio remains the same.
B. At times of decreasing VIX and increasing VVIX, we have an unstable, impulsive upwards wave. This occurs after a VIX peak. While everyone expects a lower VIX, as time passes markets get increasingly indecisive about the future of VIX. Therefore VVIX increases. VIX measures the sentiment of SPX, while VVIX the sentiment of VIX.
C. A period of unusually low VIX leads to speculative growth. This growth in the end, traps both the VVIX/VIX chart, and the price chart.
D. In the above waves, VVIX/VIX is either trending up or horizontally for prolonged periods. A variation from it is a period of prolonged VVIX/VIX drop. During this period, sentiment is homogenous, everyone believes that VIX will increase. A consistent belief in the VIX fate, is pushing VVIX lower. An unusually low VVIX describes a period like now, or 2008. Everyone is preparing for the drop.
Some examples will follow:
D WAVE (2008-2009)
I have highlighted two very important points during this drop.
First, the small circles. This is the point of a rapid sentiment change. Curiously, this point is many months after the FED is done with rate hikes. It is actually when it begins to drop rates.
The big circles are in a period of denial, a period during which everyone believes that the bottom is in. VVIX/VIX attempts to escape the descending channel.
B WAVE (2009-2011)
A WAVE (2012-2015)
C WAVE (2016-2018)
I find very interesting the retracements that occured after this rapid growth.
C WAVE (2020-2021)
D WAVE (2022)
Just like 2008, the shift in sentiment in September 2021 is very apparent. Likewise, now we are witnessing the period of denial.
As a final thought, what we are witnessing with the D waves is not the effect of FED, it is the effect of sentiment on it's own.
We witness the specific points of sentiment change, which don't depend (?) on the FED hike schedule. And curiously, they are in identical spots as in 2008. One before the peak, one in the point of denial.
Perhaps what everyone fears is the terminal rate. Or we fear the drop, we fear of losing. I don't know...
Note
Note
If anyone is interested in statistics.Note
I just noticed something incredible! VVIX/VIX is actually predicting SPX.We had a full 3 months of warning before the peak.
On September 1, VVIX/VIX warns us of a psychology change (violated trend).
At this time (of the first circles), SPX has a tiny tiny drop. This tiny thing dooms the entire growth.
By September 25, VVIX/VIX made a lower-low.
The peak in SPX came a full 2 months later at about the end of 2021. At that time, VVIX/VIX made a lower high. This is more evidence that we reached a peak.
Note
Under significant resistance from the EMA Ribbon. Just like May 2008.Note
You know what I find incredible? Human psychology. It is so predictable sometimes...On the charts below we see:
On top. SPX
Bottom White: VIX index - This actually measures the expected volatility for the next 30 days.
Bottom Orange: Actual Volatility - As measured by the built-in "historical volatility" indicator.
When a bear market begins, as seen on the charts I posted above, people get on an "anxious mode". It is the time when they first develop doubts that we will reach new highs.
By Q4, 2007 everyone understood that is some downturn ahead. Little did they know of the suffering that will come. On the back of their heads was always the fact that SPX couldn't make new all-time-highs. Every time a drop came, then a bear-market-rally followed. Every time everyone thought that "this is the bottom". VIX expectation vs actual Volatility shows that.
Actual volatility went above the expected (orange above white) whenever there was a bear rally. It shows that everyone expects LESS volatility in the future ahead. Since a significant part of investors were convinced the bottom was in. The same we witness now. This is a vicious circle. To escape the drop, you need to change mindset. Mindset doesn't change until you pass through ALL the necessary steps.
To escape this pattern, you should price in higher volatility than there is.
PS. Many believe that VIX is very high because everyone expects a drop. It looks like VIX is lower than it should. VVIX proves it. Everyone is hopeful. Until they are not.
Note
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