Virus Fears And The VIX At 30

As we prepare for a third wave of coronavirus, investors should brace for another wave of market volatility. Back in February, I wrote a piece titled, “The VIX Is Catching A Bid From Coronavirus.” I didn’t have a clue to what extent the equity markets would plunge or to what extent risk assets would rally back and reach new highs. However, I find myself more recently asking, “are market participants really pricing in a third wave of coronavirus, or are we pricing in a second & third wave of fiscal stimulus”? Whatever your belief is on the recent price action of risk assets, we should all pay close attention to the VIX, also known as the fear gauge.

Disconnect Between The VIX and Equity Markets

Traditionally, when riskier asset classes increase in price within bull markets, the CBOE VIX (VIX) typically drops in value. According to a study from Bloomberg, from January 1, 2000, to September 28, 2012, the VIX moved in the opposite direction of the S&P 500 about 80% of the time:

S&P 500 Up

VIX Index Down

Percent Opposite




S&P 500 Down

VIX Index UP

Percent Opposite




Source: Bloomberg

However, when you look at the CBOE VIX below compared to the S&P 500, you can see more of a disconnect year to date in that correlation:

Data by YCharts

This is one data point above that does not add up to me. As we can see from the table above, the VIX usually drips lower as equity markets increase. When I look back to my experience in the Great Financial Crisis of 2008, a rising VIX and rising equity market usually do not last. Eventually, the historical correlations come back into play where we see more inverse actions among the VIX and market indices. When you look at this year’s price action in the VIX, one can see a 103.3% increase. This magnitude of a rise in the fear gauge would normally correlate with a negative equity market year to date. However, we are not seeing that this year at all. Investors need to pay close attention to this correlation right now as a risk management indicator for potential trouble ahead.

Retail Investors vs. Risk Managers

An easy observation to make today is retail and professional investors are clearly trading more. Option volume in single-stock equities averaged a record 18.4 million contracts a day in August, up about 80% from the average monthly volume during 2019, according to Cboe Global Markets. In the derivative options area, call options are clearly being bought more than put options:

ChartData by YCharts

As more of an individual contrarian investor myself, I like to see periods where put options are being bought more by all kinds of investors, just like we saw in March and April of this year. Usually this period encompasses a higher VIX, lower equity market, and extreme fear investor sentiment. Normally, implied volatility falls in rising markets and increases in falling markets. In rising equity markets, investors tend to figure that further gains are limited and pay less for options, depressing volatility. With an increase of 158% in equity call option purchases, it is clear to see there are more bullish traders and investors right now. Volatility is not depressing like it does normally in typical markets, causing confusion.

Abundant Correlation Confusion

If my correlation rants above were not enough, I would like to show you a YChart of US daily coronavirus cases, the S&P 500 (SPY) and the CBOE VIX:

ChartData by YCharts

Out of any market data set I have seen recently, this is the most troubling. Over the past three months, US daily coronavirus cases have increased over 123.7%, while the S&P 500 is +9.7% and the CBOE VIX is +7.2%. How can this be? Remember the above discussion on the long-term correlation between the VIX & S&P 500. As more coronavirus cases appear and slow down productivity and growth in the US, so should real company earnings growth and future valuation estimates. Just maybe the VIX knows something we don’t?

Looking Forward With The Above VIX Illustrations

I, for one, do not try to predict market movements or guess what the weather will do. However, as more risks appear in the form of indicators such as the VIX, I do become more cautious and spend more time on risk management plans. As the coronavirus continues to increase at alarming rates, the CBOE VIX is one quantitative key indicator individual investors need to have in one’s risk management game plan. Asset classes that once seem perfectly negatively correlated to each other seem to be gaining value with each other, causing professional investors worry. However, long-term historical averages have a way of coming back around. With a VIX still hovering around 30, investors need to stay worried. Clearly, option markets still believe a sudden market downturn could happen. Just remember, on February 26, the VIX was only at 27.56. Within three-weeks of time, the VIX gained over 200% and the Dow Jones Industrial Average (DIA) dropped over 7,000 points. With a VIX at 30, it’s time to revisit your risk management game plan.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The article above represents the opinions of Mr. Josh Ortner, CTFA, and should not be construed as personal financial advice at any means.

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