Ratio analysis is popular with many investors as it can reveal insights into the relationships between two variables, two securities, two markets, two asset classes, etc.
The implied volatility of the SPX Index or the CBOE Volatility Index (VIX) represents the market expectations for the near-term price changes of the SPX Index. Derived from the prices of the near-term expirations of SPX options, it shows the 30-day forward projection of SPX volatility. Volatility is how fast prices change over time. VIX can be an excellent gauge of market sentiments, hence the fear indicator. When the VIX is trending up or when volatility rises, it represents by market fear or concern. When VIX is trending down or volatility falls, it means the market is forecasting a healthy or low-risk environment.
Treasury bond yields or interest rates are important for many reasons. It is an indicator of investor confidence since U.S. treasuries carry the full backing of the U.S. government and are one of the safest investments. Since the 10-year treasury yield (TNX) can influence lending rates, including mortgage rates, it is viewed as a sign of investor confidence about the economy. A rising yield environment indicates falling demand for treasury bonds and investor's preference for higher-risk and higher-reward investments (i.e., stocks, commodities, etc.). A falling yield implies the opposite. TNX is an economic indicator as the fluctuations yields provide information about investors' confidence in the economy and the financial markets. While rates have mostly been stable, wide dispersions are significant as they warn of structural changes in the economy and investment psychology.
The market remains in a lackluster period known as the summer doldrums, where the lack of liquidity and higher volatility can lead to sharp swings in either direction. Although the SPX Index and many indexes continue to record new all-time highs, technical indicators are mixed. Market breadth has contracted, sector rotations have narrowed, trading volume has subsided, investor sentiment and economic numbers have been erratic. It appears the mixed technical picture is best represented by a ratio analysis between the S&P 500 Implied Volatility Index (VIX) and the yield on the 10-year Treasury bond (TNX). When the ratio rises, this suggests growing investment concerns or increasing fears in the marketplace as the VIX is rising and the yield is falling. On the other hand, when the ratio declines, this implies increasing optimism or bullish tendencies as the VIX is falling and the yield is rising.
Since 2009 or at the global financial crisis bottom, there have been three instances where the VIX/TNX ratio (currently at 1.52) has violated its uptrends, suggesting an increase in optimism and bullish tendencies. The breakdown in the ratio led to SPX price breakouts and the start of the next SPX rally (i.e., 2013 and 2016). As we fast forward today, the VIX/TNX ratio shows a mixed picture, with a rising uptrend and a declining downtrend. The two converging trendlines hint at either an impending breakout or a breakdown. Above 1.84 (200-day ma) and 1.91 (Jul 2021 high) confirms a breakout and the start of the next SPX sell-off. Below 1.24 (50-day ma) and 1.00 (Apr 2021 low) confirms a breakdown and the beginning of the next sustainable SPX rally. Watch for this inflection point to develop over the near term (next few weeks/months) to determine the next directional move in SPX.
In summary, most of the long-term trends in U.S. stock market indexes remain bullish. Many of the longer-term technical indicators are also positive. Since the long-term trends remain positive, it is reasonable to expect the prevailing trends will resume. However, because technical signals are mixed near-term, traders need to be stock and sector selective into the late-summer to the early-fall period before the onset of the seasonal strength period during late-fall to winter.