An interesting scenario is emerging between the S&P 500 equity index and the Chicago Board Options Exchange’s (Cboe) Volatility Index.

What is the S&P 500?

Serving as a basket of 500 of the largest publicly traded companies in the US—a little more than 500 actually—the S&P 500 is a widely followed stock market index comprising 11 sectors.

What is the VIX?

Alongside the S&P 500, one of the most widely used indexes is the Volatility Index, or VIX index (sometimes even referred to as the Fear Index). Its main purpose is to measure volatility or the expected level of uncertainty in the market: the S&P 500.

The VIX ultimately measures the expected 30-day volatility of the S&P 500 index through SPX options. Importantly, the index is expressed as an annualised one standard deviation.

In simple terms, during periods of market turmoil, the VIX increases, showing demand for puts, or protective puts. A falling VIX, on the other hand, usually seen during bullish market phases, shows less fear in the market, and, therefore, less demand for protection against adverse market movement.

What are the Two Markets Showing?

As seen from the two charts, set to the daily timeframe, I have overlaid the Bollinger Bands on the VIX and the 200-day simple moving average on the S&P 500 at 3,938.

While the price has indeed made its way south of the 200-day simple moving average on the S&P 500, typically identified as a bearish signal, this could be problematic for bears.

Out of the VIX chart, we can see that the index has recently broken the upper Bollinger Band (set to two standard deviations based on a 20-period simple moving average) and touched levels not seen since October 2022 (30.00), which means the VIX will eventually revert back to its mean (20-day MA). In these situations, traders look for a close beyond the upper band, followed by a subsequent close back under the band. Given the inverse correlation between the VIX and the S&P 500, such movement implies we will see the S&P 500 discover support around current prices (or even around nearby support of 3,799) and attempt to reclaim position north of the recently breached 200-day simple moving average.

Hence, breakout selling beneath the S&P 500’s 200-day simple moving average COULD be troublesome with the VIX as far north as 30.00.

Charts: Trading View

DISCLAIMER:

The information contained in this material is intended for general advice only. It does not take into account your investment objectives, financial situation or particular needs. FP Markets has made every effort to ensure the accuracy of the information as at the date of publication. FP Markets does not give any warranty or representation as to the material. Examples included in this material are for illustrative purposes only. To the extent permitted by law, FP Markets and its employees shall not be liable for any loss or damage arising in any way (including by way of negligence) from or in connection with any information provided in or omitted from this material. Features of the FP Markets products including applicable fees and charges are outlined in the Product Disclosure Statements available from FP Markets website, www.fpmarkets.com and should be considered before deciding to deal in those products. Derivatives can be risky; losses can exceed your initial payment. FP Markets recommends that you seek independent advice. First Prudential Markets Pty Ltd trading as FP Markets ABN 16 112 600 281, Australian Financial Services License Number 286354.