VIX has never been at such a steep discount to SPX 20-day historical volatility
The
CBOE Volatility Index (VIX) has been on a roller-coaster ride in August, with the market's "fear gauge" up 122% month-to-date -- and the majority of that advance coming during
last week's record-setting run. As it stands now, VIX is up roughly 124% year-over-year, and 41% year-to-date.
Despite VIX's recent surge, it is still running at a discount to the
S&P 500 Index's (SPX) 20-day
historical volatility (HVs). Specifically, over the past 20 days, SPX HV has jumped 127% to 28.11, versus the Aug. 27 VIX close of 26.10.
According to Schaeffer's Quantitative Analyst Chris Prybal, it is rare to see the VIX at a discount to SPX 20-day HV while it is simultaneously so elevated. In fact, out of all of the previous "VIX discount" signals, this one involves the largest VIX advance on record.
While there was a signal in mid-July, VIX was trading at about half of where it is today -- and the discount was driven by a drop-off in SPX HV, not a VIX pop. The last time the VIX discount signal even came close to its current level was in August 2011, when the VIX was up 91%.
So, what does this mean going forward? Prybal ran the numbers, and if past is precedent, this signal could spell good things for the SPX down the road. While the broad-market barometer has averaged a three-day loss of 0.1% following a VIX discount signal, the return jumps to 4.2% looking out 126 days. This compares to an anytime three-day return of 0.1%, and 126-day return of 3.7%.
