When VIX Hits 'Maximum Turbo'

Fear is spiking, with the CBOE Volatility Index (VIX) reacting excessively to moves in the S&P 500 Index (SPX)

by Adam Warner

Published on Dec 14, 2015 at 9:29 AM
Updated on Jun 24, 2020 at 10:16 AM

Well, so much for Churn Central. We're now officially into "The Wall of Worry: Credit Markets Edition." The market is pretty much daring the Fed to hike into this. I'm guessing a hike is still treated better than inaction, but clearly the equation is changing.

Anyways, it was quite the eventful week in CBOE Volatility Index (VIX)-land. Our favorite fear gauge popped 65%, thanks to a huge 3.7% drop in the markets.

Wait, what? That's kind of extreme, right?

Well, yes -- very. We're trending towards excessive reaction, but this is getting a bit much. I run a rolling 20-day average of the VIX:S&P 500 Index (SPX) correlation, and it's up to a quite robust -0.95. Last I checked, it can't go higher than -1.00, so we're at pretty much maximum turbo here. The 20 day lagging VIX:SPX multiplier is up to (really down to, but think absolute here) -9.98, which is on the path to the highs (lows) we saw in August.

151214 VIX-SPY ratio


VIX itself closed 38.26% above its 10-day simple moving average, which ranks 19th all-time in the 5,761 days the SPDR S&P 500 ETF Trust (SPY) has traded.

151214 VIX-SPY returns


Generally speaking, it's been a good time to get long the market when VIX gets this stretched, with average one-month returns of 2.75% and three-month returns of 7.77%. I didn't winnow out here, so there's so duplication of data. But it's also worth noting that overbought VIX can beget wildly overbought VIX, like it did just this past August.

These pops are getting more and more common, by the way. As you can see above, six of the top 20 stretched VIXes have occurred in the last 15 months.

As far as VIX futures go, we're way more nervous now than in August. Here's the term structure Friday vs. Aug. 21. Keep in mind Aug. 21 was also a very ugly Friday, but also keep in mind that the actual VIX is 3.5 points lower now than it was back then.

151214 VIX futures


We're about 3 points higher across the board in futures, with VIX 3.5 points lower. That's a huge uptick in fear. The iPath S&P 500 VIX Short-Term Futures ETN (VXX), which proxies a 30-day VIX future, was up 15% Friday, vs. the 26% VIX pop. It typically tracks 40-45% of the VIX move, and generally lower than that when VIX pops as futures price in mean reversion.

In other words, our "mean" assumptions have absolutely exploded. Roll it all together and we're in a huge fear burst here. VIX is reacting excessively to SPX moves and VIX futures, and pricing in some permanence to the VIX lift.

It's very, very, very tough to stand in the way when markets cascade. It's especially tough on a Friday. Perhaps the volatility markets are "smart" and it's about to get even uglier here. I would hardly be shocked to see this continue a bit. But odds are it's just too much extra fear too soon, and it's going to look oversold pretty soon.


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


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