This Volatility Signal Has Marked Key S&P Turning Points

The SPX has moved by at least 2% in either direction for the last four weeks

by Rocky White

Published on Feb 21, 2018 at 8:11 AM
Updated on Feb 21, 2018 at 8:11 AM

Stock market volatility had been extremely low for several years, but it has spiked over the past few weeks. The Cboe Volatility Index (VIX), which measures the implied volatility of S&P 500 Index (SPX) options, sits around 20. The last time the VIX averaged 20 for an entire year was 2011. Additionally, the S&P 500 has moved up or down at least 2% the last four weeks in a row. The last time we've seen that was, once again, 2011. This week I look at how stocks have behaved after the first sign of volatility.

Is Volatility Back?

As mentioned above, the S&P 500 has moved at least 2% the last four weeks in row for the first time in over six years. In fact, the index suffered its worst week in years recently, only to immediately notch its best week in years -- something we haven't seen since 2001.

Going back to 1950, I looked at how the S&P 500 performed after four-week streaks of plus- or minus-2% moves, after at least a year without such a streak. There have been 17 other signals of this kind since 1950.

The first table below summarizes the returns for the index after these signals. It looks very mixed. First, looking at the Standard Deviation row doesn't indicate that volatility is once again rearing its ugly head. The returns after these signals shows less volatility than the typical returns, at least by this measure.

Performance-wise, the SPX has underperformed in the first three months after a signal, averaging a return of less than 1%, with barely half of the returns positive. The anytime three-month return is a 2% gain, on average, with 66% of the returns positive. When you look longer term, however, the S&P 500 tends to outperform after these signals. A year later, the index averaged a 12.59% gain, with 88% of the returns positive, compared to a typical-year return of 8.8% and 73% positive.

                          S&P 500 After Streak Signals

Signals Have Marked Key SPX Pivots

Below are charts of the S&P 500 with each of the signals marked with a red dot. Sometimes a chart shows you things that can’t be seen in a table. Some of the signals are innocuous, but a significant number of them seem to occur at key turning points, whether it’s turning higher or lower.

S&P 500 Chart With Signals

New Volatility Could Point to Short-Term Weakness

Finally, there’s one more way to look at these signals. I figured there might be a fundamental difference between signals that happen when the market is in a downtrend compared to an uptrend.

The table below considers only the signals that happened when the S&P 500 was up the prior year. In this case, there have been 11 signals -- however, the short-term results are even worse than before. Over the next three months, stocks tended to lose value. The average SPX return in these instances was negative, with fewer than half of the returns positive. The longer-term returns aren't too far off from typical market returns. Based on this analysis only, our newfound volatility could indicate some short-term weakness ahead.

S&P 500 After Streak Signals Positive  

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