VIX at Pre-Pandemic Levels, Summertime Volatility Possible?

Written by: Rafael Zorabedian

As the S&P 500 marches on, the VIX is trading at pre-pandemic levels. Will the fear index remain subdued all Summer, or could a return of volatility be in the cards?

Last week seemed to be one of those weeks where the market could do no wrong . After digesting the previous week’s interest rate stance changes from the Fed, the S&P 500 just kept climbing and climbing last week, reaching all-time highs once again. Weak economic data print via Flash Services PMI? No problem; market higher. Unemployment Claims printing higher than expected? Also, no problem. Weak New Home Sales print? The market said no problem. The S&P 500 had plenty of upside to get last week, and it got it. What about this week?

Figure 1 - S&P 500 Index March 13, 2021 - June 25, 2021, Daily Candles Source

Towards the end of last week, we had two gap higher opens in a row; on Thursday and Friday. At the same time, we really do not have an extreme overbought condition via RSI(14), with the reading at 62. We closed at all-time highs on Thursday and Friday, and things have been looking rosy for the bulls.

So, while we were having these strong up days at the end of last week, I started watching the $VIX intraday, looking at not only the cash $VIX; but the front-month VX futures as well. I indeed noticed a solid bid under the market (especially in the VX front-month futures). While the volatility was still lower, there was indeed some bid to the market; you could just feel it and see it by watching. So, let’s take a look at the $VIX:

Figure 2 - $VIX Volatility Index December 9, 2019 - June 25, 2021, Daily Candles Source

Above, we see the $VIX at its pre-pandemic levels and our current levels. What caught my eye last week (especially on Thursday and Friday) was the bid under the Volatility Index , even as the S&P 500 advanced higher and made all-time highs on gap-up days.

While the $SPX and $VIX do not have a 100% inverse correlation, they are certainly inversely correlated for the most part. Let’s take a more zoomed-in look at the daily price action late last week:

Figure 3 - $VIX Volatility Index May 5, 2021 - June 25, 2021, Daily Candles Source

Divergences like we see here really capture my attention. Clearly, there was a bid under the Volatility Index last week, even as the $SPX was trading new highs.

It only makes sense. Money managers of all kinds are wise to use all-time highs to hedge portfolios by purchasing protection in the form of $VIX calls when volatility is low. Could this be a prelude to things to come over the Summer? What do you think?

It seems that we are at an “in-between” point of some sorts. While the $SPX is not flashing any extremely overbought technical warning signs, it has risen quickly from its 50-day moving average. Combining that fact with the price action in the $VIX last week, it all paints an inconclusive picture for me at the moment.

I think it is wise to be in tune with the state of the $SPX and $VIX ; and their relationship with one another.

This week, we have the big Non-Farm Payroll data on Friday, and the market will be waiting for that data. The above-described divergence could be a sign of overall sideways price action heading into the number on Friday.

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Related: Fed Dot Plot Changes. US Equities Lower Post-FOMC Statement

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