This VIX Data Point Looks Bearish for Stocks

Following former VIX signals, volatility has surged in the short term

Karee Venema
Aug 23, 2017 at 9:21 AM
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It's been a volatile month for the U.S. stock market, with the CBOE Volatility Index (VIX) soaring to levels not seen since the early November presidential election as political uncertainty surrounding President Donald Trump ramped up. In fact, the VIX surged 30% or more within one week -- only the third time this has happened in the history of the market's "fear gauge." And while last Thursday's 32.5% pop marked the second of these volatility spikes, VIX still ended lower on the week -- a relatively rare signal that could spell short-term trouble for the S&P 500 Index (SPX).

According to data from Schaeffer's Senior Quantitative analyst Rocky White, there have been just four other times VIX has posted a single-session gain of 30%, only to end the week at a loss. This signal last flashed in late August 2015, resulting in a one-week return of 6.7% for the VIX and a one-week loss of 3.4% for the SPX. The most extreme example of a continued volatility surge occurred after the July 2014 signal, when VIX was up 41.2% two weeks later, and 109% three months out! This coincided with a 2.7% and 5.8% drop for the SPX, respectively.

vix signal august 22

spx signal august 22

On average, VIX has returned 4.7% one week after a signal, nearly quadrupling its anytime one-week average return since 1991. This outperformance is seen at the two-week and three-month marks, too, with the elevated risk for a bigger volatility pop seen in the higher-than-typical standard deviations, too.

vix post signal returns august 22

Stock returns, on the other hand, tend to be lower than usual after this VIX signal, with the SPX averaging a 2.6% loss looking out one month, compared to an average anytime gain of 0.8%. What's more, in the four other times the VIX pops 30% in one day and ends the week lower, SPX has not turned in a single positive performance at the two-week and one-month markers, compared to an anytime percent positive of 59.2% and 63%, respectively.

spx post vix signal returns august 22


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