2 Bright Sides to Monday's Unlikely VIX Pop

The CBOE Volatility Index's (VIX) huge lift to start the year was historic, and a potentially bullish signal

Jan 5, 2016 at 10:00 AM
facebook twitter linkedin

Let's start our year with a positive point. You're probably outperforming the market so far in 2016!

On the flip side, it's very likely you have no recollection of opening the year worse than we did yesterday. You'd have to go back to 1932 to find an uglier start to a calendar year. The good news is, we didn't come close to that year's drop of over 8%.

The CBOE Volatility Index (VIX) rose nearly 13.67%, making it the largest lift for "Trading Day 1" of any calendar year. The previous high was an 11.69% lift on Jan. 2, 2001. In general, strong VIXes are unusual for the first day of the year. Here they all are, back to 1990:


In fact, excessive VIX pops in January are relatively uncommon, and in early January, they're unlikelier still. VIX lifted 11.97% on Jan. 5 last year, which ranked as the 262nd largest one-day VIX lift ever. Not counting yesterday, that marked the 19th largest January VIX pop ever:


Using that 11.97% as a floor, yesterday marked only the fifth time ever that VIX has popped at least that much in the first 10 days of a year. Using the "Poisson-a-tron," there's only a 27% chance of seeing an observation that low (or lower), suggesting yesterday was a somewhat unlikely day to have seen such a vol pop.

But, here's some good news: A one-day VIX pop, in general, does not predict future stock returns all that well. The correlation between the VIX move and stock returns one month out is 0.0249 over all days.

BUT, if we look at just the correlation of the VIX move on Day 1 of the year vs. returns one month out, that correlation jumps to 0.2523. That suggests this sort of VIX pop is modestly bullish going forward. So we have that going for us!

And hey, we have another "positive." VIX is closing in on overbought, in that it's about 17.25% above its 10-day simple moving average (SMA).

I'm in the process of retiring the table I run every time VIX closes >20% the SMA. The reason is that I've run it on a "since 2009" basis. But I'm starting to come to grips with the assumption that we're in a VIX regime change, and I'm no longer just comparing observations from a "low" VIX regime. Thus, it's a somewhat arbitrary endpoint. But FWIW, here's how it looks:


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


Now is the time to join our thriving community of Event Traders who consistently profit from every earnings season. With this discounted subscription opportunity, you'll stay ahead of the curve and seize opportunities others miss. Do not let Q3 earnings season pass you by – subscribe now and supercharge your portfolio with expert insights that turn market reactions into profit-generating opportunities!! Don't waste another second... join us right now before the next trade targeting +200% is released!