SPXU in black, which is essentially the inverse of the SPX.
VIXY in red, which is a measure of volatility.
The first chart, which covers the March to August 2014 period, shows that as the SPX increases steadily, the SPXU obviously decreases steadily, and because the volatility is low, the VIXY decreases almost in unison with the SPXU.
The second chart, which covers the Sep 2011 to Jan 2012 period, has an interesting period from mid Oct 2011 to late Nov 2011. The interesting point to note is that the VIXY (in red) remains significantly higher than the SPXU due to the volatility associated with the SPX. That is the VIXY and the SPXU can decouple when the SPX has high volatility. Consequently, if a trader expects the SPX to behave erratically for several months, but with no clear trend up or down, then a long trade with the VIXY could be the solution. Anybody agree?
Now the question that remains is what will the SPX do while the Fed is ending QE and jumping at shadows while deciding to increase interest rates or not, or possibly reintroducing QE a few months after the QE taper first finishes. Will this be an erratic volatile market during which the VIXY could perform?
