How stocks tend to perform based on the VIX relative to the SPY’s historical volatility
The CBOE Volatility Index (VIX) is sitting right around the 20 area. While this level is not extremely high, it is elevated compared to the 20-day historical volatility (HV) of the S&P 500 ETF (SPY). Plus, the VIX recently closed above 20 while the SPY’s 20-day HV was below 10 — an uncommon occurrence.
For those unfamiliar with the VIX, it's calculated using S&P 500 Index (SPX) options and measures the market's expected volatility for the SPX over the next 30 calendar days, or roughly 20 trading days.
The VIX is typically slightly above the 20-day HV, but moves in tandem with it. Recently, it’s been moving in the opposite direction as HV, as you can see in the chart below. This week, I’m examining how stocks tend to perform based on the VIX relative to the SPY’s HV.
When SPY Historic Volatility Moves Below 10%
The 20-day HV of the SPY recently moved below 10% for the first time since July. Using data since 2000, the first table below shows how the SPY performed when its 20-day HV was below 10%.
The second table shows how it performed other times. In these circumstances, the SPY has tended to underperform typical market returns out three months, but just slightly. The percentage of positive returns align with typical returns. The underperformance is due to limited upside. The standard deviation of returns is significantly lower, which is expected, while the longer-term returns (six months) have been bullish.
When VIX Premium Moves Above 100%
With the SPY’s 20-day HV currently in single digits, the VIX is predicting significantly higher volatility over the next 30 days. The disparity could be related to the election next week. In the tables below, I analyze SPY returns when the HV is below 10%, categorized by the VIX premium to HV. Currently, the VIX is around 20, while SPY’s 200-day HV is below 10%, resulting in a VIX premium exceeding 100%.
The tables show the SPY tends to underperform in these situations. The SPY has averaged a 0.19% return over the next month in these situations of low HV and relatively higher VIX. The second table shows when HV is below 10%, but the VIX is more on par with HV. In that case, the ETF averages a 0.52% return over the next month. Based on the data above and below, it would not be surprising to see a slow, underperforming market going forward.
A Closer Look at Election Years
With the election coming up, I thought it would be interesting to see how the SPY 20-day HV and VIX typically look heading into the elections. I bolded the rows which look most like this year.
In 2012 and 2016, we had a VIX reading just below 20 with a 20-day HV significantly lower than that. The SPY got off to a slow start after the 2012 election, falling almost 4% over the next couple weeks. However, in both of those years the returns really picked up after that, with the SPY up around 7% after three months and up 12% and 14% over the next six months. Most investors would be happy with that.
