Exploding MOVE/VIX Ratio: A Major Warning Sign

2023年4月8日

Hey everyone 👋

Guess what? This post was created by two TradingView users! SquishTrade and I collaborated on this post.

We wanted to share our thoughts about the MOVE/VIX ratio, which has been exploding recently, and which may be presenting a warning about the future movement of the S&P 500 (SPX).

Before we begin, here's a bit more about the MOVE index:

The MOVE Bond Market Volatility Index measures the expected volatility of the U.S. Treasury bond market. It is calculated based on the prices of options contracts on Treasury bonds. The higher the price of these options, the higher the expected volatility of the market. The MOVE index is widely used by investors, traders, and analysts as a measure of risk in the bond market, as changes in market volatility can have a significant impact on the prices of bonds and other financial instruments.


The above image shows a 10-year U.S. Treasury bond issued in 1976.

Here's a bit more about the VIX volatility index:

The VIX is a measure of volatility in the stock market. More specifically, the VIX measures volatility by using weighted prices of SPX index options with near-term expiration dates. When the VIX volatility index was created by the Chicago Board Options Exchange (CBOE) in 1993, it was calculated using at-the-money (ATM) options. In 2003, the calculation was modified to include a much wider range of ATM and out-of-the-money (OTM) strikes with a non-zero bid. The only SPX options that are considered by the volatility index calculation are those whose expiry period lies within more than 23 days and less than 37 days.


The above image shows the highest VIX ever recorded at the close of a trading day. It occurred near the start of the COVID-19 pandemic shutdown.

Recently, SquishTrade discovered that the ratio between the MOVE bond volatility index and the VIX volatility index has been rising along a trend line (as shown below).



Indeed, since 2021, the MOVE/VIX ratio has been exploding higher and is now approaching the highest level ever.



SquishTrade identified that the daily chart of the MOVE/VIX ratio has shown a moderately strong positive correlation to moves in the S&P 500, this correlation appears to be statistically significant.



Citing the above chart, SquishTrade further explains that:

The peaks in MOVE/VIX seem to correlate with peaks in SPX, especially since late 2021 (exceptions in yellow circles). This makes sense. When a rise in MOVE occurs, but VIX stays low, this raises the ratio. Of course, when VIX stays low, it's almost always because SPX price has risen or remains supported. Overall, higher MOVE and lower VIX suggest underlying problems in broader bond markets / financial system / economy AND that this is not being reflected in implied volatility (IV) for SPX. In other words, for a variety of reasons, some of which may have to do with volatility players, equity volatility shows that equities don't care yet.

When the VIX rises, the ratio falls. The interesting thing is that the peaks in MOVE/VIX correspond with the peaks in the SPX. The other interesting thing is the general trend up in MOVE/VIX and the corresponding trend down in SPX since late 2021.

So when MOVE/VIX peaks, it is as if rates markets are flashing red, and SPX is rallying like all is well. That process continues until a top in both SPX and MOVE/VIX occurs, at which time SPX gets the memo, VIX rises, and the MOVE/VIX and SPX fall together.

My response to SquishTrade's above analysis is that: It is my belief that the explosive move higher in the MOVE/VIX ratio relates to the capital dislocation hypothesis, which I explain in further detail in my TradingView post below:

In short, the capital dislocation hypothesis is that there is far too much capital in the stock market (SPX) for bond yields to be as high as they are (and while GDP growth is also as low as it currently is). Similarly, S&P 500 volatility (VIX) is far too low for bond volatility (MOVE) to be as high as it is, as SquishTrade alludes above.

Exeter's inverted pyramid (shown below) ranks financial assets according to safety, with the safest assets at the bottom of the inverted pyramid. Whenever an asset lower down on the inverted pyramid becomes volatile, riskier assets above it tend to experience some greater degree of volatility. This often occurs on a lagging basis since macroeconomic processes are not instantaneous.



Therefore, we can extrapolate that the extreme volatility of U.S. Treasury bonds will likely precede extreme volatility in riskier asset classes, including stocks. Consequently, the exploding MOVE/VIX ratio is likely a warning that the VIX may move much higher soon. Chart analysis of the VIX, as shown below, potentially supports this conclusion.



Bond volatility, as measured by the MOVE index, has likely increased due to the market's extreme uncertainty about the future of interest rates and monetary policy. This extreme uncertainty underpins the stagflation paradox: persistently high inflation pulls the central bank toward monetary tightening (higher bond yields) while liquidity issues and slowing economic growth pull the central bank toward monetary easing (lower bond yields), thus resulting in bond volatility. The explosion of bond volatility is likely a sign of impending stagflation, which may be severe. For more of my stagflation analysis, you can read the below post:

Certain futures markets, such as the Eurodollar futures market, which typically guides the Federal Reserve's monetary policy, have been experiencing historically high volatility, as shown below.



The above futures chart suggests that the uncertainty about future interest rates stems directly from ambivalent market participants. Since the Federal Reserve generally follows the market, if there is extreme uncertainty and ambivalence about the future of interest rates among market participants then the result will likely be a period of whipsawing monetary policy (whereby the Fed hikes, cuts, hikes, and cuts interest rates in rapid succession). In the quarters and years to come, we will likely see extreme monetary policy whipsaw as the Federal Reserve grapples with the dueling high inflation and slowing economic growth crises that characterize stagflation.


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Important Disclaimer
Nothing in this post should be considered financial advice. Trading and investing always involve risks and one should carefully review all such risks before making a trade or investment decision. Do not buy or sell any security based on anything in this post. Please consult with a financial advisor before making any financial decisions. This post is for educational purposes only.

2023年4月25日

注释

The VIX appears to have bounced on the 5-year trend line on its daily chart.



Chart from SquishTrade

2023年6月4日

注释

This past week, the MOVE/VIX ratio experienced its highest weekly close ever, surpassing the previous record set in 2004.

2023年6月8日

注释

This is a scatterplot of the weekly relative strength index for the VIX. As of the time of writing, we are currently at the lowest value since 2009.

The tide continues to pull out...

2023年10月3日

注释

TLT is now trading more than 4 standard deviations below its mean.

This type of extreme oversold condition is common for mania stocks that crash but this type of move is virtually unprecedented for long-term U.S. government securities.

Although I believe that Treasury bond yields will move much higher in the years (and probably decades) ahead, right now they are way too overextended and need a retracement before they move much higher. We are likely in the upper wick phase of the yearly chart of government bond yields.

Nonetheless, it is at these extreme levels that stop loss and liquidation feedback loops can occur.