Just about every investor is familiar with the VIX. What many don’t know is that there is a short-term VIX and a longer-term VIX. Calculating the ratio of the short-and long-term VIX shows us if volatility traders are more concerned about the short or long-term.
Here’s a unique take at the CBOE Volatility Index or VIX in correlation with its lesser-known cousin, the CBOE S&P 500 3-month Volatility VXV (Chicago Options: ^VXV).
The VIX (NYSEArca: VXX) is a gauge of expected volatility for the next month.
The VXV is a gauge of expected volatility for the next three month.
The VIX / VXV ratio lets us know if volatility traders are more concerned about the short-term (1 month) or long-term (3 month).
As with most everything VIX related, this works better as a contrarian indicator.
The S&P 500 / VIX / VXX Ratio chart below plots the S&P 500 (SNP: ^GSPC) against the VIX/VXV Ratio.
As of Friday, the VIX/VXV Ratio dropped to 0.87. This basically means that volatility traders expect less volatility over the month compared to the 3 month.
The ratio is not yet extreme, but it’s close to the 0.856 reading that coincided with the September high.
Since 2011, the S&P 500 (NYSEArca: SPY) has struggled when the VIX/VXV ratio was around and below 0.82.
Based on the VIX/VXV Ratio, the S&P 500 is approaching a level where caution is warranted. Further insight is provided by VIX seasonality.
The last time we looked at our proprietary VIX seasonality chart was on October 8. At the time, VIX seasonality suggested a minor VIX (NYSEArca: TVIX) high and a bounce for stocks.
VIX seasonality kept us on the right side of the trade in early October, but the real big seasonal VIX turning point is still coming up.
The VIX seasonality chart (available here: VIX seasonality chart) highlights the second-best seasonal VIX trade of the year.
Simon Maierhofer is the publisher of the Profit Radar Report.
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