Stock Market 'Fear Index' Just Did This for First Time Ever

The VIX just breached its lower Bollinger Band after 425 days

by Andrea Kramer

Published on Apr 18, 2018 at 12:57 PM
Updated on Apr 18, 2018 at 1:03 PM

The Cboe Volatility Index (VIX) -- also know as Wall Street's "fear index" -- yesterday ended lower for a sixth straight day, and closed beneath its lower Bollinger Band (BB) for the first time since August 2016, or 425 trading days ago. That marks the longest streak above its lower BB ever, going back to 1990 (as far as we have VIX data), according to Schaeffer's Senior Quantitative Analyst Rocky White. Here's what that could mean for the VIX and the S&P 500 Index (SPX) in the near term.

First, there are a lot of signals different traders utilize with the Bollinger Band indicator, but there are three especially popular ones: when an index or equity's price goes above the upper BB, a trader will often view it as being "overbought"; when the price goes below the lower BB, as we saw yesterday with the VIX, a trader will often view that as being "oversold"; when the bands contract and become very narrow, some traders use that as a signal that volatility may soon increase.

Stocks Slumped After Last 2 Signals

As alluded to above, you'd have to go back to August 2016 for the last VIX break of its lower BB. Prior to that, the "fear gauge" breached its lower BB in June 2015. Both of these technical signals preceded weakness for the stock market over the subsequent three months. Specifically, the S&P fell 4.32% after the 2016 break, and dropped 8.54% after the 2015 break. Below is how the SPX performed after the VIX broke its lower BB for the first time in six months.

SPX after VIX breaks lower BB

On average, the S&P 500 has modestly outperformed one and two weeks after these signals, gaining 0.36% and 0.46%, respectively. That's compared to average anytime one- and two-week gain of 0.17% and 0.33%, respectively, looking at data since 1993 (when the first signal occurred). However, one month later, the SPX was up a weaker-than-usual 0.56%, and three months out, the index was up just 1.07% -- about half its average anytime three-month gain.

spx after VIX signals vs anytime

VIX Nearly Doubled After August 2016 Signal

Meanwhile, the last two signals have preceded dramatic rallies in the VIX itself. After the August 2016 break, the volatility index skyrocketed 93.85% in the subsequent three months. Following the June 2015 signal, the VIX surged 85.3%.

VIX after first BB breaks in 6 mos

If past is prologue, the VIX could surge in the near term. A week after previous signals, the fear index was up 3.77%, on average -- more than three times its average anytime one-week gain of 0.86%, looking at data since 1993. Two weeks out, the VIX was up a massive 10.06%, on average, compared to just 1.37% anytime. Three months later, the volatility gauge was up 18.12%, on average, and higher 69.2% of the time. That's compared to an average anytime three-month gain of just 4.62%, with a positive rate of 45.6%.

VIX after signals vs anytime

VIX Discount Also Notable

Meanwhile, it's also worth noting that on Monday, the VIX discount -- which measures the difference between when spot VIX retreats south of the 20-day SPX historical volatility, indicating lower short-term volatility expectations are being priced in -- fell to negative 30%. Further, we had a VIX discount for 10 straight sessions -- something we haven't seen since late February, and prior to that since July 2016.

On average, and counting just one signal every 21 days, the S&P 500 dropped 2.73% two months after these signals, according to Schaeffer's Quantitative Analyst Chris Prybal. On the flip side, the VIX gained an average of 11.12%.

'Wrong Way' Speculators Could Limit VIX Upside

Nevertheless, Schaeffer's Senior V.P. of Research Todd Salamone said he still finds it "encouraging for stock market bulls that the historically 'wrong way' large speculators in the weekly Commitments of Traders (CoT) report have a record net long position on VIX futures. Given this group's poor track record, VIX upside should be limited as long as they have an extreme net long position. I expect the area just above 25, half this year's intraday high, to continue to act as resistance."


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