What Does a Low VIX Mean for Stocks?

Stock returns were typically best when the VIX was high

Senior Quantitative Analyst
Jun 26, 2024 at 8:00 AM
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The S&P 500 Index (SPX) has been in a steady uptrend for several months now. Naturally, this has led to a subdued CBOE Volatility Index (VIX). In case you’re not familiar, the VIX is measure of the 30-day implied volatility (IV) of SPX options.

A low VIX means option traders are not expecting much market volatility over the next 30 days. This week, I’m looking at how stocks have usually performed based on the level of the VIX, as well as an impressive streak of the VIX below 20.

Returns by VIX Levels

We have daily VIX data back to 1994. Since the VIX is a 30-day measure, I broke down one-month returns for the SPX based on the level of the VIX. I created five groups with an equal number of returns, and included the VIX range for each grouping. The VIX is currently just above 13, which is between the first and second buckets.

Based on the table, returns were the best when the VIX was high. The SPX averaged a 1.46% return when the VIX was above 25.6. The other four groupings do not really stand out as far as average return goes. Low VIX readings correctly predicted low volatility as measured by the standard deviation of returns.

SPX 1-Month Returns

Here’s a table with the same groups, but instead of looking at SPX returns, looking at how the VIX has changed during the next month. With the VIX being a mean-reverting instrument, it’s not surprising to see it tends to rise when it has been low. When it gets extremely high, it tends to move lower.

VIX 1-Month Returns

Below are SPX and VIX returns over the next month based on VIX level, with data going back to 2010. There's more correlation between VIX level and stock returns in the next 30 days.

The lower VIX levels ted to lead to lower stock returns, which can be attributed to low volatility. The stock returns at the lower levels are still positive about 65% of the time, however. The VIX shows it tends to move higher at lower levels, and lower at higher levels. 

2_SPX Returns

VIX Streaks Below 20

The last time the VIX traded above 20 was October -- it has now been below 20 for 164 trading days. There have only been five other streaks of this length going back 30 years. In the past, after the VIX has been below 20 for this long, it typically stayed below 20 for an average of another nine months. Therefore, with the VIX just above 13, we could still be a long way away from seeing it back above 20.

The tables below show how the SPX and VIX performed after these long streaks of a sub-20 VIX. The last such streak was in 2017, which was a good time to be in stocks, with the SPX gaining double digits over the next six months.

The two signals before that showed losses for the SPX over the next year. Between this and the analysis above, the persistently low VIX doesn’t tell us much about the direction of stocks, but volatility will most likely be low over the short term.



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