The VIX Holds Support Despite Equity Rally

As major equity indexes settled off their highs of the day, the VIX volatility index was able to bounce off of support levels.  Equities reached resistance levels early in the trading session, but ahead of Thursday earnings release by JP Morgan, some investors took profits.  The bar for earnings expectations has been set very low, and although earnings from Alcoa on Tuesday were weaker than expected, the revenue number were solid given the low expectations.


Stocks in the US gained by nearly 2% near mid-day, but the FOMC minutes, seemed to take some of the wind out of investors sails.  Traders analyzed the FOMC minutes from the meeting that took place during September.  Many were surprised to discover that 2 FOMC members favored bolder action in an effort to stimulate the US economy.

Also discussed at the meeting was other steps the FOMC could take which included decreasing the quarter percent rate paid to banks on reserves at the central bank and changing is communication to relay what conditions would be needed to force Fed to raise rates.

The correlation between the S&P 500 Index and the VIX volatility index has be close to -90% over the past 3 months.  This means that the relationship is inverse, and as equities move higher, implied volatility on the S&P 500 index moves lower.  Support levels on the VIX are near the 30% level, and a break of this level, will likely be a “tell” to investors that a new upward trend in the S&P 500 Index is beginning.   As the 5-day moving average has now crossed below the 50-day longer term moving average of the VIX, downward momentum on the index is likely to continue.  Simultaneously, the S&P 500 index is testing resistance near the 1225 level, a break would be positive for stocks.  Given the solid current range, a beak of the upside or the 1100 downside, will likely see continuation.