Schaeffer's Trading Floor Blog

What Sparks a Fear Spike?

Why Friday's spike in the CBOE Volatility Index (VIX) looks to have come out of thin air

by 3/18/2014 7:13 AM
Stocks quoted in this article:

So if it seemed like that CBOE Volatility Index (VIX) spike on Friday came in the absence of much in the way of market dip, perhaps that's because it really did arise out of thin air.

Now in all fairness, the VIX did not quite meet my strict definition of overbought. That is, it did not close 20% above its 10-day simple moving average. It did "print" there intraday, however, and overbought is best viewed more as a continuum than a series of hard-and-fast rules.

Anyway, here's a look at all overbought VIXes since 2010, including last Friday's numbers. In the first column, I show the move in the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) on the day VIX closed overbought, and in the second column, I show the move off the most recent closing highs in SPY. That's somewhat subjective, but I didn't make any bold decisions; I generally used the highest closing price over the week or two leading into the overbought VIX. And finally, I show the number of days since the high to give some sense of the speed of the market drop.

Overbought VIX signals since 2010

On average, it took a one-day SPY drop of 2.11% to push VIX into overbought territory. Last Friday, SPY only dropped 0.28%. What's more, the drop off its highs averaged about 4%, vs. 1.91% as of last Friday.

We did get one thing right though, as it's usually a 5.23-day trip from the local highs to overbought.

I think it's safe to say the market got a little too jittery given the relatively tame sell-off. Of course, options price on future expectations, not past performance, per se. The Oct. 7, 2013 incident was amid fears of a debt default, June 20, 2013 was the Taper Trauma, et al. Presumably Friday, we feared that Crimea would physically detach from the Ukraine. Or something like that. The point is, we saw relatively extreme fear given the context of 1) a very minor market drop and 2) news that seemed somewhat remote, as far as market impact goes.

VIX got pounded yesterday, giving back half its gains on the year. Now the VIX is still up almost 14% on the year with the market up on the year as well (ok, the SPY is up less than 1%, but still…). And iPath S&P 500 VIX Short-Term Futures ETN (VXX) and VIX futures continue to act well overall. It's safe to say in the general sense that the level of fear versus actual price action remains very high right now.

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.

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