What This Never-Before-Seen VIX Signal Means for Stocks

Despite a mid-month pop, the CBOE Volatility Index stayed at historically low levels for much of May

Jun 1, 2017 at 1:07 PM
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The CBOE Volatility Index (VIX) hit 16.30 on May 18 - its highest intraday mark since Nov. 10, just after the U.S. presidential election. Last month's volatility spike was likely due to the combination of growing concerns over the Trump administration's ability to pass its legislative agenda, as well as the previous day's expiration of May VIX options. Despite this blip, though, it was the lowest average May VIX on record -- a signal that could bode well for stocks.

For the most part, VIX spent May south of the 11.25-11.50 region, which is half its pre-election high, and hit a 10-year intraday low of 9.56 on May 9. Underlining this period of low volatility is data from Schaeffer's Senior Quantitative Analyst Rocky White, which showed the VIX traded at 10.86, on average, last month -- the lowest average May VIX ever, taking out 1995's previous low-water mark of 12.27.

may vix average since 1990

What's more, this is just the 11th time the average May VIX came in below 15 since 1990 -- a potentially bullish signal for stocks going forward. The near-term results are fairly lackluster, with the S&P 500 Index (SPX) averaging a post-signal loss of about 0.4% in the historically slow month of June, versus an average loss of 0.6% when May VIX is above 15.

Widening the scope highlights a more prominent post-signal outperformance. Specifically, in the June-through-August time frame, the S&P averaged a gain of 1.4% and was higher four-fifths of the time after a signal, compared to a loss of 2% and 41.2% win rate after a higher average May VIX. Likewise, the SPX has averaged a stronger-than-usual rest-of-year return of 5.11% after the average May VIX was below 15, and was higher 81.8% of the time. All time frames suggest a period of lower-than-typical volatility, per the Standard Deviation.

spx returns after average may vix below 15

Lastly, White expanded the data for the market's "fear gauge" across all months. He found that the average May VIX for 2017 was second only to the November 2006 reading for the lowest on record. Below is a chart of the 25 lowest monthly VIX readings, with January, February, and March of this year also making the list.

lowest average monthly vix readings

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