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Our long CBOE Volatility Index (VIX) nightmare has ended!
This, from Options Beat last Friday.
The benchmark gauge for U.S. stock options fell, halting an eight-day streak of gains, after better-than-estimated jobs data fueled a rally in equities.
The Chicago Board Options Exchange Volatility Index (VIX), or VIX, fell 7.6 percent to 13.93 as of 11:33 a.m. in New York. The gauge, which measures the cost of using options as insurance against losses in the Standard & Poor's 500 Index (SPX), surged 23 percent in the eight sessions before today. It hasn't risen for nine consecutive days since records began in January 1990, data compiled by Bloomberg show.
I have to admit, I had no idea that VIX had rallied for eight straight days. That's mainly because the lifts were so relatively shallow. VIX has spiked over 23% in single sessions, so that magnitude over basically Chanukah is somewhat underwhelming as far as lifts go. It took all of half a day on Friday to give back about 50% of those gains.
But alas, it raises some questions. Does a persistent VIX rally tell us anything about future market direction?
I went back to 1993 and checked out what happens in the market after the VIX has lifted for six straight sessions. Why six? Well, five-session streaks were a little too common, and seven-session streaks a little too infrequent. There were 20 streaks of six VIX rally days in a row, with the current streak about to become the 21st. So there's almost exactly one per year. Perfect!
I looked at the returns in the SPDR S&P 500 ETF Trust (SPY) after holding for one week, three weeks, and give weeks. There was only one overlap, so there were 20 unique readings in the one- and three-week windows, and 19 unique readings in the five-week.
Oddly, the only real consistent results occurred in the three-week window. SPY was higher 17 of the 20 times, for an average gain of 1.4%. For three weeks, that's a pretty decent average gain. The biggest lift was all the way back in October of 1996.
If you bought SPY on Oct. 28, 1996, you gained 6.03% in three weeks! I can't honestly say I remember the backdrop then, it's a bit before Asian Contagion and Russian something-or-other fall dips in the market.
The biggest drop was in Ö you guessed it Ö 2008. A purchase on Jan. 2, 2008 cost you 6.9% in three weeks.
What's odd about all this is that the three-week holding period is something of a magic holding period. Returns out one week averaged a 0.67% gain, with 13 wins in 20 tries, pretty much the same as if you just randomly bought at any time and held for a week. And out five weeks, you won 10 of 19 times for an average gain of 0.8%.
All in all, I'd say this VIX streak is more anomaly than market signal.
Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.