Stocks and volatility are rising in unison

Key points:

• Over the last month, the S&P 500 has closed at a 252-day high on 11 occasions
• At the same time, the Volatility Index (VIX) has failed to close at a 63-day low
• Similar conditions suggest the S&P 500 could experience a short-term correction 

Expected volatility is no longer registering new lows as stocks rise

In stock market uptrends, the S&P 500 and the Volatility Index (VIX) generally move in opposite directions. As stocks register new highs, the VIX makes new lows. However, sometimes, expected volatility troughs and rises ever so slightly as equities continue to rise.

Over the last 20 sessions, the S&P 500 has closed at a 252-day high on 11 occasions, as the VIX has failed to close at a 63-day low, denoting an environment whereby the world's most benchmarked index and volatility are trending higher in unison.

A trading model that monitors this relationship triggered an alert on Friday. The previous signal occurred in November 2021, leading to a short-term stock correction.

Similar volatility conditions led to short-term corrections

During periods when the S&P 500 recorded a significant number of 252-day highs as the Volatility Index (VIX) failed to close at a 63-day low, the world's most benchmarked struggled over the subsequent month. That was especially the case in the first two weeks, with the index showing an anemic win rate of only 31%.

While returns and win rates were pretty good over the following year, more recent precedents encountered difficulties. 

When I ran a test that shorted the S&P 500 after a signal, the optimization returned 16 sessions as the optimal holding period. The adverse outcomes are evident in the short-term outlook table.

At some point over the subsequent three weeks, the S&P 500 was negative in all but one case.

What the research tells us...

The Volatility Index has not closed at a 63-day low since 2023-12-12. Meanwhile, the S&P 500 has recorded a 252-day on 11 occasions over the prior month. A trading model that monitors when the S&P 500 and expected volatility rise in unison triggered a warning. Similar precedents foreshadowed a short-term correction in the world's most benchmarked index.