Indicator of the Week: What to Make of the Lowest VIX Ever

If you recall my article from last week, I looked at the first 50 trading days of the year and found that this year so far mostly resembles 1995. That is promising since that was a very good year for stocks. This week I show another similarity to 1995 -- the ultra-low levels of the CBOE Volatility Index (VIX) thus far this year. We have VIX data back to 1990 and the VIX has never been lower on average at this point in the year. The next lowest average VIX level was in 1995. This week I'll look at how the rest of the year tends to play out when we see such low levels on the market's "fear gauge."

Low Average VIX Years

The table below shows years that had the lowest average VIX level at this point in the year. As I mentioned, 2017 ranks first on this list, followed by 1995. The "VIX Range" column is the difference between the high and the low as a percentage of the average VIX level. This year shows the second-lowest range behind 1992, the last row in the table. In other words, the implied volatility of S&P 500 Index (SPX) options has been very low this year and has also been in a pretty tight range. Looking at the S&P 500 rest-of-year returns column, this low VIX level seems to be a bullish phenomenon.

The low VIX levels seemed to be good for the market when looking at the table above, and the table below confirms this. When the VIX averages a close below 15 at this point in the year, the rest of the year shows an average S&P 500 gain of about 9%, with seven of the eight returns positive. The standard deviation of returns for the rest of the year is significantly lower when the VIX has been low, compared to years when it has been higher. The ultra-low level of the VIX may at some point prove to be a sign of complacency, but so far, per this data, it has not shown this to be the case.

Here is a look at how these low VIX levels have played out in the shorter term. The table below is like the one above, except instead of looking at the returns for the rest of the year, it looks at the next three months. In this case, when the VIX is low the returns do not look as impressive, because the average 2.26% return substantially underperforms the average return of 6.49% when the VIX is very high. However, a 2.26% return in a quarter is actually quite good, particularly when compared to an average three-month return of negative 0.4% for years the average VIX was in a more moderate range at this point. At the end of the day, the very low VIX levels we've seen thus far this year have historically led to a very bullish stock market.