Stocks quoted in this article:
CBOE Volatility Index (VIX) is showing "All Quiet on the Western Front" now, but it wasn't all that long ago that fear ruled the roost. I'd say, about a week. One Mr. James Cramer took note of this on a recent "Mad Money" as he channeled my friend Mark Sebastian of Options Pit.
As Mark notes, VIX only closed above 20 four times between 2012 and August 2014, but since then it has closed above 20 on 14 separate occasions. Is that cause for worry? Well …
"In a healthy market, there should be an inverse correlation between the S&P and the VIX. Meaning as the S&P gets higher, investors have a sense of relief and the VIX goes down. Thus, fear subsides when the market goes up and grows when the averages plunge.
"Out of all of the red flags lingering in the charts, what worried Sebastian the most about the VIX is the lack of an inverse relationship. The charts show that volatility is actually getting higher as the S&P churns in place or reaches new highs.
"According to Sebastian, when the VIX and averages rally together this is a sign that something big is about to happen, and it will be bad.
"Sebastian thinks the patterns that he is seeing are reminiscent to the debt-ceiling crisis in 2011 where the S&P 500 was slammed and lost 16.5 percent of its value in one month. He is concerned that we are about to replay this scenario."
Let me start by saying I don't disagree with the overall thesis. I don't love viewing VIX through an absolute-number lens -- but if you're going to use a number, I would also use "20," as it's near the long-term VIX average (albeit above the long-term median). I go with moving averages and deviations from, but it gets to the same conclusions. As I've noted recently, we've seen a cluster of overbought VIX readings, and that doesn't bode well. It's somewhat similar to 2007 (cue ominous music from "Jaws").
I can see the similarity to the less ominous -- but still ugly -- 2011, as well. But on the rosier side, I bring you The Roaring '90s!
The VIX ended 1995 at 12.52, and SPDR S&P 500 ETF Trust (SPY) closed at 61.48 (and no, that's not split-adjusted). VIX actually had a mean of 12.42 in 1995, so that close was pretty representative of volatility that year. 1996 saw a bit of a pickup -- the mean reading was 16.47, and it closed at 20.92.
So the market must have tanked, right? Not exactly -- SPY rallied 20%! The pattern continued. VIX closed at 24.01 in 1997, with a mean of 22.38, yet the market rallied 31.5%. 1998 and 1999 saw essentially flat volatility on both a mean and closing basis, but an exploding market, up nearly 50% total.
I'm not at all predicting a late '90s bubble move, though it's almost the reverse black swan of expected outcomes going forward. I would guess volatility is at the beginning of an uptrend, so I concur with Mark's point. I just don't believe it necessarily portends bad things for the market itself, at least for the right here and right now. A year or so from now? Maybe not so much, but that's a ways off.
Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.