Nonsense - why the market is rallying and risk is evaporating

NOTE:  This is a partial posting.  Due to the need to share this information with a client over the web, I released the incomplete posting to allow for sharing of information.  When this note is gone, the final posting will be completed with a conclusion.  Thank you for your understanding.


Nonsense

I have been looking for the answer to the divergence is risk to equity market movements.  Readers will remember how much we look at the VIX and value it as a took to manage risk and an indicator of investor pricing of risk.  However, the VIX has been declining for quite a while.

30 day VIX graph

90 day VIX graph

Note the "Fiscal Cliff" spike at the end of December and subsequent collapse or the index that represents risk.




 1,825 day/5 year VIX graph

The above 5 year graph shows a pattern of lower highs and stable lows until this months collapse.  Seems like a technical traders dream.

So I downloaded some data and took a closer look at it.

The above chart is the closing price of the S&P 500 charted against the closing price of the VIX for the past 5 years.  The correlation coefficient for this period is -74, not an insignificant number.  The inference I took from this was that as the market moved, the risk premium followed in the opposite direction.  There did not appear to be any indication of one data set leading the other.  .