When the VIX Breaks 20, Watch Out

The CBOE Volatility Index (VIX) has been above 20 for some time now -- and you may want it to stay there

Sep 17, 2015 at 2:01 PM
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With the CBOE Volatility Index (VIX), it's hard to say what constitutes a "normal" reading. Is studying the mean preferential, or should we look at the median instead? While that, among other VIX questions, is up for debate, one thing is for sure -- as of Wednesday's close, the VIX had finished above the highly watched 20 mark for 18 consecutive days. This is the longest stretch since 2012. 

But, with the Fed choosing to leave interest rates unchanged and a press conference with Fed Chair Janet Yellen on tap, there's potential for a big volatility shift. So, what can we expect once VIX finally dips below 20? Using data from Schaeffer's Quantitative Analyst Rocky White, we can view how the S&P 500 Index (SPX) has performed in the past after the VIX ended a lengthy streak of above-20 days. Below are the findings, dating back to 2000. 


Upon first glance, the results have been positive: six months removed from a signal in October 2010, and the SPX had picked up 13.7%. In the most recent occurrence in June 2012, the S&P 500 was up 7.6% in the subsequent six-month time frame.

However, on the whole, the SPX tends to underperform after VIX notches its first close below 20. Specifically, the S&P 500 Index averages a six-month "anytime return" of roughly 2%, and is positive 65% of the time. Following the VIX's first foray below 20, though, the SPX's returns get much worse: averaging a six-month drop of 6.3%, and it's only been positive 38% of the time.


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