VIX's Occasional Divergence From the S&P 500

Vix will increase in value when investors turn bearish for any reason. Whether it be rate hike fears, a small banking collapse, war, runaway inflation, or just weakening economic data. Conversely, the VIX's value will fall when traders are getting more bullish on the market.

In either of these instances, the price of the S&P 500 and the VIX will travel in opposite directions. This is the inverse correlation between the two indices.

Occasionally, you will see a divergence within this inverse correlation. For example, VIX will be moving up alongside the S&P 500. Another example is when the VIX makes a higher high or a lower low, and the SPY does not. Eventually, this divergence will snap back to normality. When this happens, you sometimes get a squeeze in price within the S&P 500 and/or the VIX.

An example of this divergence happened on the week of Mar 15 of this year. The collapse of a couple of small banks aroused recession fears and instigated investors to short the market. This pushed the VIX up into making higher highs in its price action. At the same time, SPY was not making lower lows.

Eventually, the market realized that these collapses were not systemic and the Fed is less likely to hike rates so fast with a fragile banking sector. These factors pushed the market back upwards.

This uptick had much more momentum as the relatively large amount of investors shorting the market were squeezed out of their shorts, or they were forced to cover their short position. Essentially, these investors realized the market is going to continue to climb. They were forced to go long, which pushed the S&P 500 into the full rally mode that we are experiencing.

It is a convenient coincidence that the week of March 15 coincides with a major monthly options expiration and the most important witching day before the end of the quarter. It was also the day that the massive rally started in the S&P 500.

Some people call a coincidence like this rebalancing or rotation. And others call this manipulation or a rug pull. Either way it goes, it is smart to pay attention for divergences like this so you can get ahead of the potential momentum or trend change that could happen thereafter.

If you wanted to gain exposure to volatility via leveraged volatility ETF's or if you want to track the volatility of certain sections of the market or specific ticker symbols then here are some useful ticker symbols to follow. There are even a few volatility indices for some very popular names like Apple, Amazon, and IBM.

As always, this is not investment advice. Good luck trading. Be careful and be patient. Give your investments time. Don't be greedy. Don't invest in anything you don't understand. Don't put all of your eggs in one basket. Don't listen to the hype. Don't fomo or panic into or out of trades. And just follow the trends. A trend is your friend.