VIX/TNX Ratio Update

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 volatilities. Volatility is how fast prices change over time. VIX Index has been an excellent gauge of market sentiments, hence the fear indicator. VIX that is trending higher signals a fearful or pessimistic market. VIX that is trending lower signals a confident or optimistic marketplace.

Treasury bond yields or interest rates are significant for many reasons. It is a reflection of investor sentiments and the health of the economy. Since US treasuries carry the full backing of the US government, it is one of the safest investments. The benchmark 10-year Treasury yield (TNX) is a proxy for lending rates, including mortgage rates. A rising yield environment indicates falling demand for treasury bonds, suggesting investors' preference for higher-risk and higher-reward investments (i.e., stocks, commodities, etc.). A declining yield trend implies investors are seeking safety and low-risk investments. Fluctuations in TNX can offer insights into investors' confidence in the economy and financial markets. Dispersions in interest rates can warn of structural changes in the economy and investment psychology.

Since late last year, the increase in market volatility, dislocations in financial assets, and weak sector rotations suggest an impending inflection. Although the SPX Index and other indexes have recorded new all-time highs earlier in the year, macro and market internal indicators have become erratic. For instance, market breadth continues to contract, sector rotations have narrowed, selling volume has increased, and consumer confidence and investor sentiment surveys have declined precipitously.

A ratio analysis between the S&P 500 Implied Volatility Index (VIX) and the yield on the 10-year Treasury bond (TNX) can offer insights into the state of the economy and the mindsets of investors.

When the ratio rises with the VIX rising and the yield falling, this suggests growing investment concerns or increasing fears in the marketplace. On the other hand, when the ratio declines with the VIX falling and yield rising, this implies increasing optimism or bullish market tendencies.

Since 2009 or the end of the global financial crisis, there have been three instances where the VIX/TNX ratio (currently at 0.82) has violated its uptrends, suggesting an increase in optimism and bullish tendencies. The technical breakdown in the ratio led to SPX price breakouts and ignited rallies (i.e., 2013, 2016, Oct 2020).

As we fast forward today, the VIX/TNX has converged, signaling another critical phase is forthcoming. VIX index has declined, and the TNX has risen, leading to a breakdown in Mar 2022 below 0.90.

Is the technical breakdown hinting at the next SPX rally as it has in the past?

Is this time different as the breakdown in March 2022 differs from the previous occurrences as the TNX rises faster than the VIX?

The longer-term trend structural trend in the stock market (SPX) remains intact. It is reasonable to expect the current SPX pullback to be either a deep correction (10-20%) or a cyclical bear decline (20% plus) and not the dreaded structural bear market.

However, continued geopolitical uncertainties, Fed-rate-hike concerns, pandemic worries, and mid-term elections anxieties will likely keep investors at an edge, at least in the months and quarters ahead.

Source: Chart courtesy of

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