Should Friday's VIX Performance Really Be a Surprise?

Last week the VIX moved back above a trendline connecting higher lows from June to September

Senior Vice President of Research
Nov 29, 2021 at 9:21 AM
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…the CBOE Market Volatility Index (VIX – 17.91) is one to watch for potential clues on whether we are on the verge of higher volatility…I find it interesting that as volatility expectations increased a bit last week, the VIX did not close above a trendline connecting higher lows from June until early September … I would think that the first hint of trouble ahead for bulls would be a close above this trendline, even though the last VIX surge above it proved to be the day of its peak.”

            - Monday Morning Outlook, Nov. 22, 2021

Following the close of trading on the eve of Thanksgiving, my review of a few key charts, including that of the CBOE Market Volatility Index (VIX -- 28.62), made me ask myself, “Might we be wake up to a surprise of some sort Friday morning?”

It was the action of the VIX earlier in the week that caused me to ask this question.  Specifically, at the beginning of last week, the VIX had moved back above a trendline connecting higher lows from June until early September. Unlike the previous instance in which there was a close above this trendline followed by an immediate move back below it, the VIX closed three consecutive days above the trendline heading into the Thanksgiving holiday. Even though the measure of volatility expectations declined on Wednesday, I took note that it simply declined to that trendline, as opposed to below it, leaving me to ponder what, if anything, it was telling us. More specifically, what it was telling us about the immediate future and if we could be on the verge of a volatility surge. 


Bulls would like to see the VIX move back below its 2020 close, to be a sign that there is a promising resolution to the headlines from Friday. A move above the intraday highs since May could signal there is still more danger to come, within the respect of selling off equities and higher volatility expectations. A silver lining for bulls is that the VIX intraday high on Friday was around prior intraday highs in May and September.

Coronavirus fears returned to rattle markets Friday. Investors were worried that the variant, dubbed B. 1.1.529, could set back months of effort to revive the world economy and save lives. Scientists say the strain has a high number of mutations that may make it more transmissible and allow it to evade some of the immune responses triggered by previous infection or vaccination.”

            - The Wall Street Journal, Nov. 26, 2021

Scientists are trying to ascertain how quickly the new variant can spread and whether it is resistant to Covid-19 vaccines. BioNTech expects the first data from laboratory tests about how it interacts with its vaccine within two weeks.”

            - Bloomberg, November 26, 2021

Unfortunately for bulls, the concern that I had about a VIX move above the June-September trendline hinting at trouble came immediately into fruition after a new variant of Covid-19 was first discovered in South Africa. It created a new “known, unknown” for market participants, because it is unclear how easily the variant, referred to as B.1.1.529, can be transmitted, and whether current vaccines will be effective against it. Such uncertainty should begin to be alleviated in the next two weeks as the first laboratory tests are revealed. But this new uncertainty did its damage on Friday, driving stocks lower and volatility expectations higher. 

Just as the VIX gave us advance notice on what was brewing at the inter-continent level with respect to Covid-19, it may be a harbinger as to how quickly we can combat this new threat if needed. For bulls, the good news is that Pfizer (PFE) and Moderna (MRNA) should be able to quickly develop a vaccine to combat this new threat if needed. But a VIX move back below that trendline could occur before headlines surface from BioNTech. If good news is about to emerge, we may see the VIX back below that June-September trendline.

The current unwinding from relatively high negativity in September, combined with all-time highs in a positive seasonal period suggests remaining the bullish course. With the VIX bouncing from the 15 area, which appears to be a floor, a hedge might be worthwhile since index options are cheap – at least when compared to the past year.”

            - Monday Morning Outlook, Nov. 8, 2021

“…one thing still weighing on my mind is the three-day pattern on Nov. 5 (a Friday), Nov. 8, and Nov. 9. These three days are not officially a bearish “tri-star doji” pattern (which has preceded bearish short-term moves this year). However, the two consecutive doji -- a daily candlestick in which the open and close are the same or nearly the same -- days followed by the SPX’s close at its low on Nov. 9, may still be a risk factor worth being cognizant of, as the SPX is below the Nov. 8 close that was part of the three-day pattern I am talking about.”

            - Monday Morning Outlook, Nov. 22, 2021



Whether it was price action in the VIX in the days before Thanksgiving, a relatively-low VIX earlier in the month, or technical-related stuff to a few daily candles in the S&P 500 Index (SPX -- 4,594.62) during the course of November (reference above in a Tweet), there were solid reasons that one should not have been caught off guard by Friday’s action.  

The variant headlines drove costs for portfolio insurance higher as stocks declined significantly on Friday. While the indicators were not necessarily bearish in their implications, they at least have a hedge to protect long positions, as such hedges should typically be bought before, not after, volatility surges like we saw last week. I used the word typically because a VIX reading of 26-28 could still prove to be relatively low in the days and weeks ahead, but this remains to be seen.

So now what? For bulls, it may be of value to assess potential risk now that “the cat is out of the bag” with respect to clues we had prior to Friday’s negative headlines. 

For example, now that the SPX is back below the channel that began in November 2020 when positive vaccine news emerged, where is the next line of potential support? (I find it interesting that the move back below its channel occurred on news with respect to questions on how current vaccines will handle the new variant).

Given the significance of the 50-day moving average this year, this would be a start in assessing downside risk from Friday’s close. And coincidentally, per the chart below, this trendline is sitting just below the SPX’s September highs, when a bearish “tri-star doji” pattern tipped us off to bearish short-term price action in September. This area is between 4,525, its 50-day moving average, and 4,535, the September peak.

The Nasdaq-100 Index (NDX -- 16,025.58), for what it is worth, closed just above the 16,000-millennium level on Friday. Such round levels have been important inflection points in the past. If this level is breached, a potential support area is at 15,675, or the September highs.


Todd Salamone is Schaeffer's Senior V.P. of Research

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