Indicator of the Week: VIX Spikes
By Rocky White, Senior Quantitative Analyst

Foreword: There was finally some volatility in the market last week. The S&P 500 Index (SPX) was down 2% on Tuesday, and then fell some more on Wednesday. Over those two days, the index fell a total of 2.6% -- which is its biggest short-term loss since last August. The CBOE Market Volatility Index (VIX), which tends to move in the opposite direction as the market, spiked higher as a result, moving up 35% over the two-day period. The chart below shows the VIX and SPX going back to 2010. The yellow circles denote prior instances where the VIX gained at least 30% over a two-day period.

VIX Spikes: When the market begins falling, traders scramble to put on hedges to guard against a significant drop in the market. A popular way to hedge is to buy put options on the SPX. The scramble to purchase these options increases option premiums -- and, in turn, the VIX. That's why the VIX is called the "fear index." Below, we'll see how previous VIX spikes have turned out for the market.

Going back to 2000, there have been 11 other times when the VIX gained at least 30% during a two-day period. Below is a table showing how the SPX performed afterwards. All of the signals have occurred since 2005. So, for comparison, I also have a table showing how the SPX has typically performed since then.

Analysis: The returns are pretty bearish for the market during the next two weeks to a month following previous VIX spikes. What caught my eye was that the percent positive two weeks later was 36% -- but one month later, it was 73%. However, the average return is very negative one month out. So, what's going on? Below is a table showing each of the individual results after a signal.

There is a pretty clear divide in the table above between the returns before 2008 and the returns after. Before 2008, the big VIX spikes were nothing to worry about. All five signals before 2008 preceded a higher market one month later. Since 2008, it's been a different story. Three of the six returns have not only been negative, but they have been very negative. Two of the signals happened during the 2008 market crash, and the other negative signal happened just before the May 6, 2010 "flash crash."

This Week's Key Events: February Payrolls in Focus
Schaeffer's Editorial Staff

Here is a brief list of some of the key events this week. All earnings dates listed below are tentative and subject to change. Please check with each company's respective website for official reporting dates.

Monday

• Economic data comes fast and furious this week. On Monday, the calendar kicks off with December's pending home sales, personal spending and income for January, the Chicago purchasing managers index for February, and the Dallas Fed manufacturing survey for February. On the earnings front, we'll hear from A123 Systems (AONE), Overstock.com (OSTK), Edison (EIX), and Rosetta Stone (RST).

Tuesday

• Tuesday morning brings us the Institute for Supply Management's (ISM) manufacturing index, as well as auto sales data for February. Meanwhile, Federal Reserve Chairman Ben Bernanke will begin a two-day tour of Capitol Hill with testimony before the Senate Banking Committee. The earnings schedule includes AutoZone (AZO), Domino's Pizza (DPZ), Hovnanian Enterprises (HOV), and ReneSola (SOL).

Wednesday

• The pace picks up on Wednesday: We'll hear the ADP payroll report for February, Bernanke's testimony before the House Finance Committee, the latest Beige Book from the Fed, and the regularly scheduled update on domestic oil supplies from the government. Also on the day's docket are quarterly reports from Costco (COST), BJ's Wholesale (BJ), Staples (SPLS), and PetSmart (PETM).

Thursday

• Key economic reports on Thursday include weekly jobless claims and the ISM's nonmanufacturing index for February. Scheduled to report earnings are H.J. Heinz (HNZ), Marvell Technology (MRVL), Novell (NOVL), and Silver Wheaton (SLW).

Friday

• All eyes will be on the Labor Department's nonfarm payrolls report for February, with a Dow Jones survey revealing expectations for an increase of 192,000 jobs. That key report hits the Street before the open, while January's factory orders will be released mid-morning. Meanwhile, the earnings calendar slows to a crawl, with Bronco Drilling (BRNC) and Madison Square Garden (MSG) among the small handful of companies reporting.

And now a few sectors of note...

Prepare for the investing week ahead. Every week, Bernie Schaeffer and his staff provide you with their insight about what has happened and, more importantly, what will happen in the market. We dig deep and show you what's happening behind the scenes, and tell you which indicators are predicting major market moves. If you enjoyed this week's edition of Monday Morning Outlook, sign up here for free weekly delivery straight to your inbox.