Most traders are familiar with the VIX Index or the implied volatility of SPX. The equivalent volatility index in the bond market, the MOVE Index, is not as popular.
The ICE BofA MOVE Index calculates the weighted average of the implied volatilities of 1-month expiration options on the 2-year, 5-year, 10-year, and 30-year Treasuries.
The MOVE and the VIX are similar as they measure short-dated one-month volatilities. The former tracks the implied volatility in the bond market and the latter on the stock market. They are both coincident indicators, neither forward nor backward-looking.
Historically, a tight correlation exists between the movement and the day-to-day activities of the underlying securities and the options on them.
While VIX receives the bulk of headline news, the MOVE Index has become increasingly valuable due to the recent banking debacle and uncertainties behind the Fed monetary policies. Bonds are the larger of the two markets, suggesting the MOVE Index is a leading indicator of stock market trends.
Theoretically, MOVE and VIX trade together, moving in tandem as risks fluctuate between the two asset classes. As the MOVE Index accelerates, it warns of impending problems in the financial marketplace because bonds typically are not as volatile as stocks.
Bond volatility has increased recently, probably due to uncertainties regarding the future of interest rates, Fed monetary policy, inflation, and recession concerns.
Stubborn inflationary pressures can force the central bank to hike rates further, leading to higher yields. At the same time, concerns of a hard landing and banking turmoil can force the Fed to ease and lower yields. If the two conditions persist, this warns of an economic stagflation cycle or worse.
Since 2021, the MOVE/VIX ratio has been trending higher as it nears chart highs. Tops in MOVE/VIX have correlated with heightened financial market conditions, leading to peaks in SPX.
The ratio can rise in either of two ways. MOVE moves up faster than the VIX, or VIX declines more than MOVE. The equity volatility (VIX -19.10) continues to diverge from the bond volatility (MOVE – 139.78), with VIX trading significantly below MOVE.
Does this imply stocks are stabilizing?
Or does this warns of impending problems in the bond market, credit conditions, financial system, or the economy?
Also, since 2021, tops in the MOVE/VIX ratio have correlated closely to tops in SPX.
It seems to imply that if the MOVE/VIX continues to trend higher, it warns of VIX also soon moving much higher, which may trigger another stock market selloff.
Traders and investors need to monitor MOVE, VIX, MOVE/VIX ratio, and credit spreads for signs of impending directional trend changes in stocks and bonds.
If MOVE/VIX and yield spread ease, this hints at the next stock market bull rally.
If MOVE/VIX rallies to record highs and yield spreads tighten, this warns of the next stock market selloff.