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Reviewing the Impact of Previous VIX Spikes

Broader-market implications of sharp VIX increases

by 2/26/2013 8:03 AM
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Just when it looked like the market would lull all of us to sleep, we get a bit of a Bunga-Bunga party in the CBOE Market Volatility Index (INDEXCBOE:VIX). It rallied 34% -- a pretty impressive showing, considering it was unchanged two hours into the day.

How big was that lift, relatively speaking? I show it as the largest one-day pop since Aug. 18, 2011 and the sixth-largest of the last 20 years. Feb. 27, 2007 holds the indoor record for biggest VIX pop as our favorite vol Index jumped a staggering 64.2%.

All in all, I found 20 instances in the last 20 years where the VIX lifted more than 25% in a single session. It has become a far more common occurrence in recent years, as 15 of the instances took place since May 2006.

Perhaps the most remarkable aspect of VIX pops is the rather unremarkable market action that often follows. Five trading days out, the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) is up an average of 0.9%, 10 days out it is up 0.1%, and 15 days out the ETF has gained 0.2%.

One issue is that a few of the VIX pops cluster, so some of these readings overlap. So to account for that, I'll remove any incidence that's within a calendar month of another previous incidence.

That leaves us with 15 VIX pops, but again not much to see here. Five days out, the SPY averages a 0.5% gain. It gained after nine of these 15 Pops, with a top gainer of 7.82% one week out from the Oct. 27, 1997 VIX-plosion. An honorable mention goes to the 7.45% lift of the Aug. 8, 2011 VIX lift.

The worst loss was the 5.98% drop after the Sept. 29, 2008 Lehman-induced VIX-plosion. That incident also saw the worst 10-day SPY move (down 9%) and 15-day move (down 11.3%). Safe to say that any time you run VIX numbers, there's an occurrence in the fall of 2008 that confirms the popular notion that VIX pops predict future market weakness.

The problem is that there isn't much confirmation at any other time. I wrote my book in the winter of 2008/09 and essentially treated VIX data from this period as a bit of an outlier, and four years of hindsight later, I'd still consider numbers you see from here as more the exception than the rule.

There is a better example of a VIX pop "predicting" a market drop. The VIX rallied 30.5% on April 27, 2010. The flash crash took place two weeks later. Three weeks later, the SPY was down over 5%. If you want a bigger stretch, the Feb. 27, 2007 VIX pop was ultimately a big inflection point in the market, though there's a lot of dot-connecting involved there.

The majority of the time, VIX pops presage very little. In 10 of the 15 incidents, the VIX was up or down less than 2% if we look five sessions out. In eight of those times, it didn't even move 1%.

Perhaps there's one pattern in recent years. The SPY has dropped in the second week out from the VIX pop in eight of the last nine instances, and the most noteworthy was the most recent VIX pop. The VIX lifted 31% on Nov. 9, 2011. The SPY did nothing in week one, then dropped over 5% in week two. That ultimately proved to be a terrific buying opportunity in the market. The VIX hit 36 on that pop, a level it has failed to reach ever since.

All things considered, there's not a whole lot to read into any of this. It's not 2008, of that I'm pretty confident. Keep in mind that these are very small sample sizes, and the majority of the time, the market has fluctuated but settled in relatively close to where it sat right after the VIX exploded.

Disclaimer: The views represented on this blog are those of the individual author's only, and do not necessarily represent the views of Schaeffer's Investment Research.

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