Watch This Week's Extremely Rare Dow-VIX Divergence

Yesterday's rare signal by the Dow and VIX has historically been bullish for stocks

Mar 3, 2017 at 11:00 AM
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Yesterday, the Dow shed 112.6 points, while the CBOE Volatility Index (VIX) plunged 5.8%. This is interesting, for one, because the Dow and VIX are usually inversely correlated -- that is, as one rises, the other typically falls. For another, Schaeffer's Senior Quantitative Analyst Rocky White pointed out that this is just the fourth time it's ever happened. The three previous occurrences are listed in the chart below, which shows the percentage losses on the Dow and VIX, as well as where the VIX settled:

djia vix

While the sample size is limited, it's interesting to see what's happened next, historically speaking. Starting with the VIX, you can see below that the market's "fear gauge" has drifted lower across all time frames, going out to a month. Of course, with the VIX docked at 11.55, it's considerably lower than where it was during any of the previous three instances -- so a fear spike may be more likely this time around.

djia vix

Turning to the Dow, it's worth noting that with the blue-chip barometer nearing record highs -- and above the 21,000 millennium level, at 21,013.24 -- a triple-digit loss has lost a bit of its significance. On a percentage basis, yesterday's 112-point fall translated to a relatively modest 0.5% loss -- far narrower than the previous percent losses.

Putting that caveat aside, the Dow has tended to fare well following these rare signals. Per the chart below, the blue-chip index was higher across all time frames after both the August 2015 and June 2016 occurrences. On the other hand, returns were negative in 2008, when U.S. markets were in the thick of the financial crisis.

djia, vix


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