Traders working on the floor of the New York Stock Exchange.
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An unusual trend in the stock market emerged recently as the latest sign that perhaps greed is the driving force behind the rally and investors are ignoring some key risks.
Wall Street’s “fear gauge” the Cboe Volatility Index, which typically trades inversely with stock prices, started moving in tandem at times with the S&P 500 earlier this month. The rolling 10-day correlation between the VIX and the S&P 500 turned positive on Nov. 14, the first time this has happened in six months, according to FactSet.
“When this correlation, and like many others recently, get out of whack would imply that something else is driving stock prices,” Roberto Friedlander, head of energy trading at Seaport Global, said in a note on Thursday.
The so-called VIX is a measure of the stock market’s 30-day expected volatility computed from the market prices of the call and put options on the S&P 500. When the market goes down, investors would want to purchase insurance, which drives up the prices of put options and increases the VIX. The VIX decreases when there’s less demand for put options as the market rises. That’s why it tends to move inversely to equities.
The fear gauge is also flirting with a two-year low, hovering around just 13 points, as investors cheer the record-setting rally, shrugging off a never-ending trade war and a heated impeachment probe into President Donald Trump.