Inside Markets — Volatility Spike

The CBOE Volatility Index (implied equity volatility) closed at elevated levels (27.62) yesterday. Elevated VIX levels >22 usually act as a headwind for rally attempts. Big spikes in equity volatility – like the one we saw yesterday – tend to start in other larger markets like fixed income or FX. Recall the last spike in equity volatility (August 5) started in FX markets after a surprise BOJ rate hike resulted in a violent unwinding of the yen carry trade. The VIX reached an intraday high of 65.73 and closed at 38.57 on that day before a surprising return to subdued levels (<20) in the six sessions that followed. Once implied equity volatility spikes above ~30, it usually takes months to unwind. Interestingly, yesterday’s spike in implied equity volatility didn’t start in FX markets or fixed income. The MOVE Index (bond market volatility index) actually ticked lower yesterday, despite a ~12 bp backup in 10-year yields. Unfortunately, this fact doesn’t make the rise in equity volatility less valid and the SPX will have difficulty moving higher while the VIX remains north of ~22.

The SPX closed below its 50-day moving average of 5922 yesterday that CTAs and other systematic funds often use as a buy/sell trigger. Now that the SPX is below its 50-day average, we see increased likelihood for the index to close in the 11/6 upside gap at ~5783 and use that level as near-term support.