When all was said and done no this holiday shortened week, the S&P 500 dropped a whopping 0.28%. A late day Friday rally resulted in almost a flat week, but anyone that was trading this past week can tell you it felt like more than just a quarter percent drop. If you just got voted off an island and saw the week over week change in the S&P 500 and VIX you may wonder why VIX rallied almost 14% in four days. The answer is the way the S&P 500 traded on the week, dropping below 1500 and recouping much of the loss on Friday. I often get asked about the quantifiable relationship between the S&P 500 and VIX and my response usually includes an explanation of VIX reacting to the method of price change in the S&P 500. If the S&P had lost a fraction each day to settle down 0.28% on the week we may be discussing VIX at post 2008 lows, instead the path it took was a bit more dramatic and VIX reacted accordingly. Note the dramatic flattening of the VIX curve. I spend more time paying attention to that than the absolute level of VIX. The June – October VIX futures all lost value this past week and the futures than gained only jumped a fraction of the spot VIX index. This tells me that volatility players believe this past week was a short term blip in what may be a bullish year.
The NASDAQ-100 underperformed the S&P 500 this past week and lost just about 1.00%. In turn VXN ran up 16.41% for the biggest change amongst the tradable volatility indexes this past week. VXN price action was similar to VIX with the futures underperforming the spot index and a flattening of the curve. The curve tells the same story as the VIX curve as far as the expectations for continued bullish stock action and lower volatility indexes in the near future.