Following a sharp post-election selloff in early November -- which coincided with a broad stock market surge -- the
CBOE Volatility Index (VIX) has spent nearly all of 2017 bouncing between 11 and 13. According to data from Schaeffer's Senior Quantitative Analyst Rocky White, last week marked the 10th straight in which the
VIX did not make a 10% move in either direction -- a relatively rare phenomenon. In fact, this has happened just 12 other times going back to 1990, with the most recent occurrence in November 2006.
Drilling down on the data surrounding these streaks of low volatility signals points to more of the same in the near term, with the VIX post-signal standard deviation lower across all subsequent time frames compared to anytime returns since 1992. While VIX does tend to outperform on a percentage basis at both the two- and three-month markers after notching 10 straight weeks without a move of 10% or more, standard deviation over both periods is lower than usual.
Looking at the S&P 500 Index (SPX), meanwhile, this period of low volatility has historically been a bullish indicator for stocks. Per the chart immediately below, in the two-week period following this rare VIX signal, the SPX has averaged a 1.1% gain and has been positive 83.3% of the time, compared to an anytime return of 0.3% and 58.8% positive. Three months post-signal, the SPX has averaged a 3.9% return versus an anytime gain of 2%, and is positive three-quarters of the time.
However, as Schaeffer's Senior V.P. of Research Todd Salamone noted in this week's
Monday Morning Outlook, call open interest on
VIX options is currently at a record level ahead of tomorrow morning's CBOE Volatility Index (VIX) expiration. Salamone warns that if "the expiring VIX calls are hedges to the enormous short position among large speculators on VIX futures ... or are hedges to long portfolios -- the days immediately after VIX options expiration are when we are most vulnerable to a volatility pop, as unhedged investors are more likely to panic on negative headlines."
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