As post-election fear fell off a cliff, so too did traders' appetite for VIX calls
Ahead of the U.S. presidential election, the
CBOE Volatility Index (VIX) -- also known as the market's "fear barometer" --
went on a record-long rally, reflecting the growing uncertainty on Wall Street. However, despite a knee-jerk reaction to the downside following Donald Trump's surprise win, stocks ultimately went on a tear, with the Dow just recently snapping its record-setting win streak. In the midst of this seismic sentiment shift, two rare signals just went off for the
S&P 500 Index (SPX).
The American Association of Individual Investors (AAII) sentiment survey last week enjoyed its
biggest one-week advance in self-proclaimed bulls since July 2010. This week, bullish sentiment continued to increase, and now sits at the most elevated level since Feb. 26, 2015. Further, this is the first time since October 2015 that at least 40% of AAII respondents identified as bullish.
AAII bulls jumped 23.1 percentage points in two weeks, marking the biggest two-week gain since September 2010 -- and before that it was March 2009 -- according to Schaeffer's Quantitative Analyst Chris Prybal. This is just the 17th time we've seen such a remarkable jump in AAII bulls, going back to 1992. On average, following these signals, the S&P has enjoyed better-than-usual returns over the subsequent three months, and less volatility than usual, as measured by standard deviation.
In fact, the SPX's average two-month (eight weeks) post-signal return of 2.21% is nearly double its anytime two-month return of 1.31%, going back to 1987. The percent positive is higher than usual, too, at 69%, compared to 65% anytime. However, going out six months (26 weeks), the S&P tends to underperform its anytime returns, averaging a post-signal gain of 3.45%, compared to an anytime gain of 4.25%. Plus, the SPX is higher just 63% of the time six months after a signal, compared to 72% anytime.
Meanwhile, as post-election fear fell off a cliff, so too did traders' appetite for VIX calls. In October, the VIX
20-day buy-to-open call/put volume ratio was skyrocketing, ultimately peaking at 5.57 -- the highest point since late June 2015 -- roughly a week before the election, on Oct. 31. Since then, the ratio has taken a nosedive to 2.05 -- the biggest 12-day percentage drop since December 2014. In fact, the ratio has dropped by 63% or more in that short a time frame just two other times (not accounting for signals in the same two-week span): December 2014 and April 2007.
With such a small data set -- and opposite reactions after both instances -- it's difficult to predict where the S&P could go from here. After the April 2007 signal, the S&P enjoyed bigger-than-usual returns over the next two months. On the other hand, following the December 2014 signal, it was a downhill ride for the SPX over the next eight weeks. Still, such a rare occurrence is worth a mention, if only to further reflect the post-election about-face in Wall Street sentiment.
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