With the S&P 500 up more nearly 40 points at mid-afternoon Tuesday, Masanari Takada, Nomura’s head of macro and quantitative strategy, is likely giving colleagues a knowing nod. On October 12, after the S&P bottomed after losing nearly 145 points over the previous two days, he wondered aloud about the potential for volatility to reverse direction “within the next two business days.”
In looking at a VIX mean reversion trade, Takada takes a statistical look at an asset that has at times violated statistical correlations.
The VIX index is perhaps one of the most technically correlated of all major assets to another related asset. The VIX is a derivative of S&P 500 trading and the two assets are often assumed to track one another. This correlation pair was deeply tested on February 5, 2018, as the VIX, which is designed to follow S&P 500 behavior, actually preceded the stock market during a market crash.