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A Disconcerting Development in the CBOE Market Volatility Index (VIX)

The VIX is enjoying an unprecedented ride atop support from its 10-day moving average

by 10/20/2008 12:10:38 PM
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Beyond the market volatility that has gripped investors for the last few weeks, one of the more disconcerting developments we've seen has been the "trendiness" of the CBOE Market Volatility Index (VIX). The trend of the VIX has been very consistent over the past several weeks, as this fear barometer has been finding support from its short-term moving averages.

Below is a snapshot of the VIX with its 10-day and 20-day moving averages. Standing out from this graphic is the fact that the VIX has not experienced a close below its 10-day moving average since August 28. The VIX has fallen to intraday lows below this trendline, but it has not closed below it.

Daily Chart of VIX since April 2008
With 10-Day and 20-Day Moving Averages

In fact, the VIX has not experienced a close below its 10-day moving average during the past 35 trading days. Looking at the VIX data since 1990, we have never seen such a long-term trend develop in the VIX. Previously, the longest such pattern occurred over 21 days in February 2003.

Below is a table of the longest streaks of the VIX staging consecutive daily closings above its 10-day moving average. Obviously, since the VIX is inversely related to the S&P 500 Index (SPX), these were very challenging market periods -- and the one we're currently experiencing is no exception.

VIX closings atop 10-day moving average

Finally, the accompanying table shows the performance of the S&P 500 Index in the days following a VIX close below its 10-day moving average. Historically, this has been a bullish omen. Once the VIX broke below this short-term trendline, following a streak of at least 11 sessions above it, the SPX has returned 2.59% on average over the next month, with the market being positive 76% of the time following such events.

SPX following VIX breach of 10-day moving average

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