The VIX Just Did This for the Third Time in History

It's rare for the stock market's 'fear gauge' to rally 30% or more twice in a week

Aug 18, 2017 at 12:42 PM
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The CBOE Volatility Index (VIX) surged more than 30% on Thursday, as U.S. stocks suffered their worst day in three months. Just a week prior, the VIX -- or the stock market's "fear gauge" -- skyrocketed more than 40% in one day. According to data from Schaeffer's Senior Quantitative Analyst Rocky White, it's only the third time ever the VIX has experienced two single-session jumps of 30% or more in one week. Below, we take a look at previous VIX signals, and how the S&P 500 Index (SPX) fared after both.

Coincidentally, perhaps, the other two signals also occurred in the month of August -- in 2011 and 2015. However, since 1990 -- when our VIX data begins -- the index typically hits its year-to-date lows around the middle of July, before bursting higher into the months of August into October. The VIX did, in fact, hit a record low of 8.84 on July 26. What's more, after the last two signals, the VIX was in the 40s, whereas the fear barometer is currently in just the low teens.

In any event, after the past two VIX signals, wherein the index rallied 30% or more twice in one week, the VIX cooled off significantly over the next month. After the August 2011 VIX signal, the index fell 30.5% over the next month; it dropped nearly 46% in the month after the August 2015 signal. 

VIX after signal


Meanwhile, stocks -- as measured by the S&P -- turned higher over the short term. The SPX was up 7.6% one week after the August 2011 signal, and was 7.07% higher a month later. A week after the August 2015 signal, the SPX was 4.17% higher, but had pared that gain to 2.41% a month out.

SPX returns after VIX signal


While the sample size is very small, it's encouraging that the S&P 500 Index recovered after these rare VIX signals. However, as Schaeffer's Senior VP of Research Todd Salamone wrote recently, "[W]ith the looming threat fresh on the minds of investors, volatility historically low and a big short position to be unwound in the VIX futures market, I'm thinking the U.S.-North Korea crisis will prop up volatility levels. Therefore, the cost of portfolio protection will remain high in comparison to the levels during most of May, June, and July."

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