The VIX goes Crazy!

By the close of the NYSE today, the VIX was up almost 40%. And the DOW was down almost 400 points. What the heck happened?

Why You Should Care:  The CBOE Volatility Index – known to investor simply as the “VIX” – is another index.

Created in 1993, many consider the VIX to be the one of the best barometers of investor sentiment and market volatility.   And, as we’ll discuss below, it is also very highly correlated to the default rate in ‘high-yield’ bonds and the high-yield bond spread.

So, if the VIX is jumping, this could indicate underlying weakness in the more marginal companies and debt issues.  Should we be concerned?   Does this portend an end to the current economic expansion?

Taking Action:  Not yet.  The VIX lift and the stock market sell-off are likely a general reaction to this morning’s comments from Boston FED President, Eric Rosengren.

http://www.wsj.com/articles/feds-eric-rosengren-sees-reasonable-case-for-gradual-rate-increases-1473423300

Let’s see what happens next week…but for now, hold steady.

The BLOG:  Here’s a chart showing this week’s VIX readings:

All week, it was hovering around 12.5 – and today shot up to 17.5.   Almost a 40% increase.   Wow!  Quite a jump!

How does this compare to historic VIX readings?   Let’s take a look at the past 5 years:

Clearly, the VIX has been extremely low in the recent past.  This aligns well with the stability we’ve been seeing in other economic data, including the SHI.  It bottomed at 11.69 on August 12th…and has been hovering between the mid 11s and 13 for a month or so.

On February 12th – during the “China Scare” – the VIX jumped up to over 26.

What’s really fascinating about the VIX is it’s near perfect correlation with the “High-Yield Bond Spread.”   Said simply, the High-Yield Bond Spread is the difference between junk bond yields and investment grade corporate bonds.   Take a look:

See that?   A 96% correlation!   Again, said simply, this means that where the VIX goes so does the ‘spread’ between high-yield and investment grade bonds.   Notice, however, this graph shows ‘moving yearlong averages’ meaning it doesn’t track short term movements.   Only longer term.

Which means the movement on one day means very little.   Yes, today’s market action was cruel and lifts all our animal spirits.   But one day does not a trend make.

So, for now, we’ll lick our wounds and take our losses for the day … head home … and drink copiously.    🙂

• Terry Liebman