Yesterday saw traders (more likely, computers) push stocks sharply higher on the heels of an apparently more dovish Fed. In the case of the S&P 500 (SPX), we are talking about a gain of 2.3% on the day. So does that mean that the re-test is over and stocks are in the clear for their year-end rally? Perhaps not yet, at least according to the volatility market. As most market participants know, volatility expectations typically fall when stocks rise, especially a big rise like yesterday. However, despite the huge up day in stocks, the 1-month S&P 500 Volatility Index (VIX) hardly slipped at all. Furthermore, the 9-day S&P 500 Volatility Index (VXST) actually rose 3% on the day.
If you think that’s unusual, you’re right. In fact, it is the first time since its inception in 2011 that the VXST rose on a day when the S&P 500 closed at least 2% higher.
So what does this mean? Is it smart money fading the Fed-inspired rally…or a manifestation of fear, opening the way for even higher prices based on a contrarian analysis? In a Premium Post at The Lyons Share, we examine this unprecedented development from a historical and quantitative perspective to determine whether these volatility traders are likely correct in their skepticism of the rally – or exhibiting undue fear.
The Barclays Bank PLC iPath S&P 500 VIX Short-Term Futures ETN (VXX) was trading at $35.04 per share on Friday morning, down $0.44 (-1.24%). Year-to-date, VXX has gained 25.50%, versus a 3.00% rise in the benchmark S&P 500 index during the same period.
This article is brought to you courtesy of Dana Lyons’ Tumblr.