The Volatility Signal Seen Only One Other Time

Volatility has been on the rise this month, amid growing uncertainty surrounding the "Brexit" referendum in the U.K. This heightened anxiety is evident in the price action of the CBOE Volatility Index (VIX) -- the stock market's "fear gauge" -- which measures short-term volatility expectations for the S&P 500 Index (SPX) via its options prices.

At its June peak, the VIX hit 22.89 -- its highest perch since Feb. 19 -- bringing its month-to-date gain at that point to 61.3%. More recently, the VIX was seen at 18.74 -- down 11.5% today, with voting currently underway in Britain over whether the country will leave or remain in the European Union (EU).

While such spikes in volatility are typically accompanied by a big downside move in stocks, the SPX is up nearly 0.4% month-to-date, a historical feat in and of itself. What's more, "VIX premiums" -- which weigh the S&P's 20-day historical volatility (HV) against the spot VIX -- spiked to 213% yesterday.

This is just the second time ever that VIX premium has jumped north of 200%, according to Schaeffer's Quantitative Analyst Chris Prybal, with the metric hitting 289% on Dec. 31, 2010. While the sample size for this indicator is extremely small, the SPX went on to perform well after the previous signal. Specifically, the S&P was up 1.1% one week after the record VIX premium surge, and 2.8% over a two-week time frame. Going out about six months returned 6.5% for the SPX.

Meanwhile, according to Prybal, these large VIX premiums are more a result of a decrease in the S&P's HV, than an absolute increase in VIX. For instance, on Dec. 31, 2010, the SPX 20-day HV registered at 4.57. Yesterday, this metric hit 8.19, and was last seen at 6.77.

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