Westpac’s Director of DCM Graeme Jarvis posed and interesting question on Twitter this morning – how often do you see the market make a new all-time high and the VIX volatility index alike rise 2%?
The implied question is whether it makes sense.
At first blush the answer is no, because volatility is often associated with downside risk and as you can see in the chart Jarvis tweeted, big spikes in the VIX usually come when the stock market falls.
But there are two sides to market volatility and a couple of answers which could show that today’s seemingly opposed moves in the S&P physical and the volatility market as measured by the VIX actually make sense.
The first deals with the other side of the market. Volatility is a price and given it has been cheap recently it could simply be going up because people wanted to buy more options – perhaps topside protection because they think the market having bested 2000 will run higher.
Equally the second alternative is that with volatility low – options prices cheap – traders who still have a jaundiced view of the market bought some downside protection for a fall in the S&P 500.
Either way though last nights price action suggests the marker could be getting ready for a decent move.
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