We know that many investors use the VIX index as a fear gauge or just a measure of market risk. We also know that the same investors use the MOVE index to measure volatility and fear in the bond market. Some researchers decided to look at the divergence between these two indices as perhaps a stronger signal; see "Divergence of Fear Gauges and Stock Market Returns". The authors find that the divergence of fear indexes (regressing MOVE on VIX and using the residuals and the MOVE/VIX ratio) is a negative predictor of future equity market returns. This predictor does well for both in-sample and out-of-sample tests.
Looking at the difference between MOVE and VIX indexes is a simple measure that can be followed by almost any investor. Simplcity may make this indicator obsolete if "everyone" is using it, but in the near term, we think this is a good, simple signal tool that I have been using for some time in different forms.
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