Swing Trading Strategies & Stock Picks Since 2003

With all of the interest being generated by Friday’s Is the VIX Being Gamed? I thought it might be a good time for this week’s chart of the week to build on a tangential subject: the meaning of a simultaneous rise in the VIX and the SPX. Lately I have heard more than a few observers comment that the recent positive correlation between the VIX and the SPX – specifically the simultaneous rise in each index – is a bad omen for stocks.

Frankly, the SPX:VIX correlation is a subject I have been blogging about since the early days of the blog, with some of the more memorable posts on the subject included in the links below. So far I have published very little on weekly correlation data for the VIX and the SPX, but that is about to change, starting with this post.

The chart below shows weekly bars of the SPX and VIX going back to the beginning of 2008. There have been five instances since the beginning of 2008, that both the VIX and SPX have risen in the same week (a relatively low number by historical standards largely because a large majority of weeks during this period have seen the SPX lose ground.) All five instances have been flagged with a blue arrow on the chart.

While five instances is a long way from being able to draw any meaningful statistical inferences, I think it is interesting to note that there were two consecutive weeks of gains in both the SPX and the VIX just prior to the sharp drop from September through November 2008. On the other hand, both the SPX and VIX in the middle of March, just as the March to July 2009 rally was gathering steam. Finally, the early June 2009 blue arrow seems to fall at a relatively uneventful time in recent stock market history.

The bottom line: don’t read too much about the SPX and VIX moving up in the same week.

For more posts on this subject, readers may wish to check out:

• Volatility Analysis for July 15, 2009
• Eerie Déjà vu as VIX and SPX Both Jump More Than 2.5%
• Performance Implications of VIX and SPX Divergences
• SPX-VIX Daily Correlation
• More Thoughts and Numbers on the SPX-VIX Correlation
• High Positive Correlation Between VIX and SPX Often Signals Market Weakness

[source: StockCharts]

Disclosure: Long VIX at time of writing.