The implied volatility of the S&P 500 index is measured by its volatility index, VIX. Similarly, the implied volatility of the Russell 2000 index is measured by RVX and the Nasdaq 100 has VXN. Most commonly, the volatility indices vary inversely with the values of the corresponding index, so higher levels of volatility normally accompany lower prices on the index. When one sees a divergence from this relationship, it is worth noting. Today's trading took the broad market indices higher, but their volatility indices also moved higher - a volatility divergence.
SPX closed at $2269, 0.2% higher, but the VIX closed at 12.0%, for an increase of 4.6%.
RUT closed at $1378, 0.5% higher, but the RVX closed at 17.4%, for an increase of 3.6%.
NDX closed at $4966, 0.5% higher, but the VXN closed at 14.2%, for an increase of 7.4%.
One interpretation is that the large institutional players were buying protection and driving up the option prices at the same time that the index prices were trading higher. Perhaps they are concerned about a pull back? That wouldn't be too surprising.
After all, SPX is up 8% since November 7th and the small caps are up even more, with RUT up over 18%. So a bit of a breather would not be too surprising. It could be argued that this increase in volatility is simply reflecting the consensus of professional traders who are expecting a bit of a pull back after such a strong run higher.
So what is the average retail trader to do? I suggest two courses of action:
1) Look over your portfolio and identify the stocks that you think have traded much higher than you think is warranted - of course, that can be a difficult judgment. Sometimes stocks just continue higher in spite of our best judgment. Taking profits on at least a portion of those positions might be prudent.
2) Don't get too far out over your skis. This is probably a good time to wait on the market. Allow some of the Trump euphoria to dissipate.