S&P 500 VIX Divergence

S&P 500 is an American stock market index based on the market capitalizations of 500 large companies having common stock listed on the NYSE, NASDAQ, or the Cboe BZX Exchange. VIX is a measure of expected price fluctuations in the S&P 500 Index options over the next 30 days and TVIX is an exchange-traded-note (ETN) that tracks an index of futures contracts on the Standard & Poor’s 500 (S&P 500) VIX Short-Term Futures Index, with 200% leverage on the volatility moves.

In long run, there is a negative correlation between the S&P 500 and VIX. However, on June 7th, 2019, both S&P 500 and TVIX increased more than 1%. This phenomenon is certainly something that does not occur very often, as there appears to be a clear divergence between S&P 500 and TVIX instead of the normal negative correlation. This kind of divergence only appeared for limited times in the past ten years. There were only 10 times that daily S&P 500 increased greater than 1% while VIX also increased instead of decreasing from January 1st, 2009 to December 31st, 2018. Among those 10 times, there were only two times that S&P 500 increased more than 2%. And S&P 500 never happened to increase more than 3% with the divergence of VIX in the last ten years. All those dates are shown in the table below.

Conditions Dates S&P 500 daily change VIX daily change
 

S&P 500 daily change greater than 1%

S&P 500 daily change greater than 2% Jun 1st, 2009 0.024208365 0.038727524
Jul 15th, 2009 0.02924622 0.034772182
Jul 20th, 2009 0.010623606 0.002465078
Sep 16th, 2009 0.015134317 0.011528608
Jul 13th, 2010 0.015088401 0.005321326
Dec 5th, 2011 0.010892199 0.011627907
May 14th, 2013 0.010333863 0.01752988
Oct 23rd, 2015 0.011256761 0.000692042
Dec 7th, 2016 0.01308074 0.036471586
Nov 28th, 2017 0.010144872 0.01621074

Among those 10 divergences, we can see from the table above there were three times that a big increase happened to the daily close price of both S&P 500 and VIX where S&P 500 increased more than 1% and VIX increased more than 3% (marked in bold). Those dates are: June 1st, 2009, July 15th, 2009 and December 7th, 2016. The candlestick charts of S&P 500 daily close price of those three dates are shown below.

From the charts above, we can see that in this kind of case, the divergence always followed by a one-to-two-week increase on the daily close price of S&P 500. Thus, it is possible to guess that whenever daily close price of S&P 500 increases more than 1% and VIX also have a big increase of no less than 3%, the price of S&P 500 in the next few days will keep increasing.

 

Except these three examples, all the other 7 divergences have SPY increased more than 1% and VIX increased less than 2%. These 7 divergences can be divided into two cases. There were three of them that the daily close price of S&P 500 had the same feature as the three examples above where the divergence followed by a one-to-two-week increase. Those three times are: July 20th, 2009, May 14th, 2013 and October 23rd, 2015. The other case happened in the rest four divergences. In this case, the daily close price of S&P 500 firstly fluctuated for one to two weeks after the divergence and then had an increase in the next one to two weeks. The dates for these four times are September 16th, 2009, July 13th, 2010, December 5th, 2011 and November 28th, 2017. Here are two examples of each of the above two cases.

From above, we can see in the short run, when the S&P 500 and VIX divergence happens, the daily close price of S&P 500 will either increase directly afterwards or increase after a one-to-two-week fluctuation.

The chart above is a monthly candlestick chart of S&P 500 and all the divergence dates from the last ten years are labeled in the chart. We can see from the chart above that all those months in which the divergence happened are at the beginning or the middle of a long run increase of S&P 500. And after that month, the price of S&P 500 all had a long-time increase from long run. Thus, it is reasonable to conclude that after the S&P 500 and VIX divergence, the price of S&P 500 will always increase in a long run.

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