Rare VIX Signal Sounds Again

Coronavirus fears have stocks selling off

Jan 27, 2020 at 2:47 PM
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Worries of a coronavirus outbreak have sparked panic selling on Wall Street today, with the major stock indexes all staring at intraday losses of 1% or more. This fear is being seen in the Cboe Volatility Index (VIX), too, which earlier spiked to levels not seen since October -- and sounded a signal seen just 10 other times in the last 16 years.

Specifically, VIX opened today at 17.42, 19.6% above Friday's close at 14.56. While Monday morning gaps of 10%-15% are quite common -- occurring 41 times since September 2003, there have been just 10 occurrences over this time frame where VIX gapped 15% or more on a Monday morning, according to data from Schaeffer's Senior Quantitative Analyst Rocky White. 

Looking at the data, VIX tends to run out of steam following this initial pop, averaging a post-signal open-to-close decline of 0.5%. At last check, the index was up 17.5% at 17.11, and earlier topped out at 19.02.

Measuring from its Monday morning open to the next day's close, the market's "fear gauge" has averaged a 5.54% drop following the past 10 occurrences. This is much larger than the 1.2% "after any Monday" retreat averaged over the past 16 years. 

vix monday returns jan 27

As Schaeffer's Senior V.P. of Research Todd Salamone has indicated, the stock market was already at risk of a major volatility pop this week. And in today's Monday Morning Outlook, Salamone said he still thinks "it is a good idea to use volatility instruments as a hedge if you are heavily tilted toward riding the momentum higher that began in October. And if you view Friday’s pullback as an opportunity to leg into equities that you expect to move higher, utilize call options in lieu of stocks as a risk-management tool."

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