Stock market exposure by active money managers has plummeted in recent weeks, as evidenced by the National Association of Active Investment Managers (NAAIM) survey. Specifically, last week's NAAIM index touched 56.16 -- the lowest since May 2016 -- and has fallen by 40% in the past six weeks. Against this backdrop, we decided to take a look at how the S&P 500 Index (SPX), as well as the CBOE Volatility Index (VIX) -- or the stock market's "fear gauge" -- tend to perform after these relatively rare sentiment signals. Do active money managers know something we don't?

First Signal in Nearly 2 Years

The last time we saw such a steep, quick plunge in the NAAIM exposure index was late 2015 into January 2016, according to Schaeffer's Quantitative Analyst Chris Prybal. As you can see on the chart below, that pullback in money managers' exposure coincided with a sharp pullback in the SPX, but preceded a slow-and-steady rally over the next nearly two years. This time around, the NAAIM exposure index plummet began even before the stock market's current pullback, as the SPX was still exploring record highs.

SPX Tends to Outperform After Signals

Prior to the early 2016 signal, you'd have to go back to the fourth quarter of 2014 for a similar NAAIM index drop. Since 2007, there have been 15 signals. In the past, these signals have been bullish for the SPX in the short-to-intermediate term. The index has averaged a two-week gain of 1.5%, compared to an anytime average gain of just 0.3%, going back to 2007.

In the same vein, the SPX was 2.2% higher one month later, on average, compared to 0.6% anytime. The outperformance is most evident two months after a NAAIM signal, wherein the S&P was up 3.6%, on average -- more than three times its anytime average return -- and was higher 79% of the time.

However, looking four and six months after a signal, the S&P's average returns were smaller than usual, at 2% and 2.3%, respectively. Still, the broad-market barometer was in the black 79% of the time four months after a signal, compared to 71% anytime over the past 10 years. What's more, the long-term data was majorly impacted by the financial crisis, with the SPX sharply lower six months after the late 2007 and 2008 signals.

VIX Could Retreat, If Past Is Prologue

As such, it's no surprise to see the VIX tends to suffer sharp declines in the short-to-intermediate term after a sentiment signal. The "fear gauge" was in the red, on average, at every marker but two, going out six months. One and two months after a signal, the VIX was down an average of 11.9% and 12.6%, respectively, and was positive just 29% and 14% of the time. That's compared to an average anytime gain across the board, looking at data over the past decade.

The main outlier is the four-month marker, where the volatility index was up 3%, on average, after a sharp drop in the NAAIM exposure index. Still, that's less than the VIX's average four-month return of 6.3%. And again, that data is heavily skewed by the financial crisis, as the VIX more than doubled four months after the July 2008 signal.

Still No Evidence of Euphoria

In conclusion, if history repeats, the recent S&P 500 Index pullback -- and the accompanying VIX spike -- could reverse soon. After the last signal in 2016, the SPX was up more than 13% three months later, and a similar rally would put the stock market deep into uncharted territory to start 2018. Further, the drop in active money managers' exposure indicates there's still plenty of skepticism to be found -- so we have still not reached the euphoria that often occurs at a market top.

The Dow Jones Industrial Average (DJIA) and S&P 500 Index (SPX) ended last week in the red, marking their first back-to-back weekly losses since August. What's more, the indexes haven't suffered a three-week losing streak since mid-2016 -- and it's not looking like another weekly loss is in the cards, with stocks at record highs. There have been just six calendar years in history where the Dow and S&P avoided three straight down weeks.

Meanwhile, the CBOE Volatility Index (VIX) -- or the stock market's "fear gauge" -- hasn't ended three straight weeks higher in over a year, on pace for its second-ever calendar year without a three-week win streak. Let's take a closer look at these rare technical feats for the DJIA, SPX, and VIX, and what they could mean for stocks heading into 2018.

Dow Hasn't Done This in a Decade

The DJIA hasn't suffered a three-week losing streak since May 2016 -- 78 weeks ago, according to Schaeffer's Senior Quantitative Analyst Rocky White. The last time the Dow went at least 78 straight weeks without three losses in a row was in 2007. Prior to that, you'd have to go back 20 years for a signal, to just before the 1987 stock market crash. The only other signal -- and the longest -- was in the mid-1950s, when the DJIA went 107 straight weeks without a three-week losing streak.

The last time the blue-chip index went a calendar year without a three-week losing streak was 2006. Prior to that, you'd have to go back to 1989 for a signal. The first signal was in 1909, which preceded a very rough year for the Dow, losing nearly 18% over the next 12 months.

Following these years without three-week losing streaks, the Dow has outperformed at the six-month marker, up 6.66%, on average. That's compared to an anytime average six-month gain of 3.75%, since 1909. However, one year later, the DJIA was up just 0.1%, and was higher just half the time, compared to an average anytime return of 7.17% and a win rate of 65.4%.

Brexit Marked Last Time SPX Suffered 3 Down Weeks

The S&P has gone 73 weeks, since the Brexit brouhaha in June 2016, without a three-week losing streak -- the first time since the streak that ended in early 2014. The longest ever streak without three weekly losses in a row ended in 1996, at 107 weeks.

The last time the S&P 500 Index went a calendar year without a three-week losing streak was 2013 -- the only signal in the past 22 years. There have been just six of these years total, with the first in 1945.

Following these years without three-week losing streaks, the SPX was higher than usual at the three- and six-month markers, averaging gains of 4.79% and 10.34%, respectively. In fact, the index was higher 100% of the time six months after every single calendar year without a three-week losing streak. That's compared to an average six-month gain of 4.38% since 1945, with a win rate under 70%.

VIX Has Done This Just Once

The VIX has now gone 57 weeks without three straight weekly gains, with the last one happening in October 2016, amid pre-election jitters. Only two other times has the VIX gone that long without a three-week winning streak: in the mid-1990s, and during its longest-ever stretch that ended in June 2011.

There's been just one calendar year in history where the VIX didn't end higher three weeks in a row: in 2010. Three months into 2011, the fear gauge was down 1.97%, and sank 10.59% by the middle of the year. However, the index had surged 31.83% by the start of 2012.

2018 Could Start Strong for Stocks

As far as the Dow and SPX are concerned, if the indexes can make it through December without a three-week losing streak, it will be a rare feat indeed. And again, while the sample sizes are small across the board, it's worth noting that both the DJIA and S&P were notably higher than usual three and six months after these years, and the VIX was notably lower at these markers after the lone year without a three-week win streak. If history repeats, it could be a good first half of 2018 for the stock market.

U.S. stocks turned sharply lower at midday, as reports hit that former national security advisor Michael Flynn pleaded guilty over lying to the FBI, and agreed to cooperate with a special counsel investigation into possible Russian collusion in the 2016 U.S. presidential election. The quick decline in stocks sent the CBOE Volatility Index (VIX) -- or market's "fear gauge" to its highest point since Aug. 21 earlier -- and has options traders blasting the iPath S&P 500 VIX Short-Term Futures ETN (VXX), with the volatility ETN last seen up 4.3% at $33.34.

In the options pits, 210,781 calls and 167,978 puts have traded -- nearly three times what's typically seen at this point in the day, and total volume pacing in the 95th annual percentile. Nevertheless, that's still just over one-quarter of the 12-month high of 1.33 million VXX options traded in a single session back on Aug. 11.

Today, though, the action is being dominated by eleventh-hour options traders, with strikes in the weekly 12/1 series accounting for each of the five most active options. It looks like volatility traders may be buying to open new positions at the 33-, 35-, and 36-strike calls, expecting another big surge in volatility by expiration at tonight's close.

Elsewhere, it looks like one trader sold to open 10,819 weekly 12/22 50-strike calls for $0.49 apiece, resulting in an initial net credit of $530,131 (premium collected * number of contracts * 100 shares per contract). This also represents the maximum potential reward, should VXX settle below $50 at the close on Friday, Dec. 22. Risk, meanwhile, is theoretically unlimited on a move north of the strike price.

If this trader is indeed a call writer, they are likely looking to take advantage of inflated premiums. VXX's 30-day at-the-money implied volatility has spiked 19.6% today to 71.4% -- higher than 74% of all comparable readings taken in the past year, meaning heightened volatility expectations are being priced into short-term premiums.

It's been an interesting couple of weeks in the stock market, and I'm not just talking about the bitcoin explosion. Not only did the S&P 500 Index (SPX) and CBOE Volatility Index (VIX) -- or the stock market's "fear gauge" -- flash a rare divergence signal, so did the Dow Jones Industrial Average (DJIA) and tech-rich Nasdaq Composite (IXIC) -- sending up an alarm that sounded before the dot-com bubble burst. Against this backdrop, options volume has gone haywire lately, and the SPX and Nasdaq are in danger of their longest losing streaks in months.

Call Volume Explodes

The Options Clearing Corporation (OCC) reported equity options volume of more than 23.6 million contracts on Wednesday, Nov. 29 -- the most since early June. For comparison, the year-to-date average for equity options volume at the end of November was just 14.7 million.

Most of those options were calls, with close to 14.5 million contracts traded last Wednesday -- the highest since December 2012, according to Schaeffer's Quantitative Analyst Chris Prybal. The equity-only one-day put/call volume ratio of 0.64 was the lowest since early August 2016.

Echoing that, call volume on the major indexes rose by 37% over the past 20 sessions, while put volume inched just 12% higher. The 10-day average of the equity-only buy-to-open (BTO) put/call volume ratio on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and Nasdaq OMX PHLX (PHLX) fell to 0.489 on Monday, marking the lowest reading since mid-July 2014.

As Schaeffer's Senior V.P. of Research Todd Salamone advised earlier this week: "continue to use call options to participate in the record-breaking equity rally. Call options give you leverage, and it is an outstanding way to minimize your dollars at risk amid uncertainties on both the political and economic fronts."

Losing Streaks on the Line

As alluded to earlier, the S&P 500 Index and Nasdaq are in danger of extending their losing streaks to a fourth session today. If that comes to fruition, it would be the SPX's longest losing streak since March, and the IXIC's longest since October 2016.

However, if recent history is any indicator, another loss today could bode well for the indexes. The SPX and Nasdaq both averaged stronger-than-expected gains looking out three months after losing streaks since 2012. For instance, one month after a losing streak, the SPX was up an average of 2.42%, while the IXIC was 2.83% higher. That's more than double the index's anytime average one-month returns since 2012.

 

The following is a reprint of the market commentary from the January 2018 edition of The Option Advisor, published on December 22. For more information, or to subscribe to The Option Advisor -- featuring 10 new option trades each month --  visit our online store.

With a new calendar year nearly upon us, Schaeffer's Quantitative Analyst Chris Prybal recently compiled detailed seasonality stats on a list of over 60 exchange-traded funds (ETFs) and indexes. While there was, understandably, quite a bit of data to review and digest, one anomaly jumped out -- an apparent pattern of first-quarter outperformance by an ETF built to track the daily inverse of short-term S&P volatility. Among all 60-plus tickers on Prybal's list, the ProShares Short VIX Short-Term Futures ETF (SVXY) boasted some of the strongest average monthly returns during the months of January, February, and March (looking at all monthly returns since inception).

This historical precedent of strong first-quarter returns is compelling in part because -- given that SVXY is structured to deliver the inverse of the daily returns of short-term CBOE Volatility Index (VIX) futures -- ProShares specifically prescribes against longer holding periods, and recommends daily management of positions. But the first-quarter outperformance registered by SVXY was intriguing enough to prompt a further investigation into the historical returns -- including back-testing a few option strategies to see if there's any reliable way to capitalize on SVXY's first-quarter strength.

Per the table below, note that March boasts the strongest average SVXY return of any month, with a somewhat improbable 100% of those returns being positive. You can see how, building on the very respectable average gains logged in January and February, the blockbuster March performance by this ETF has been a key contributing factor to the robust first-quarter results.

Drilling down further to isolate the individual monthly returns for each year, we find that January has been a volatile month for SVXY in the past six years, with results split between three double-digit percentage losses and three double-digit gains. February is comparatively quiet, with five of the six returns firmly in single-digit territory (but four of the six positive). And then there's the March line-up of positive returns -- two in the single digits, with the remaining four split between hefty jumps in the neighborhood of 15% and 37%.

Monthly returns that outpaced SVXY's "anytime" 21-day average for that respective year are bolded in the table below. March boasts a near-perfect record on this front, save for one near-miss in 2014.

Likewise, the summary of monthly returns below confirms that March is a beyond-standout month for SVXY. Not only has the ETF outpaced its typical monthly average return, median return, and percent positive, but it's also somewhat less volatile than usual, as measured by the standard deviation of returns. Conversely, January is considerably more volatile than most other months, with only a 50% shot at a positive return (despite the downright unassuming average and median returns for this month).

Of course, the most pressing question from a trading perspective is: How do we exploit SVXY's first-quarter performance? Schaeffer's Senior Quantitative Analyst Rocky White constructed some theoretical options trades to find out. In the table below, you'll see the results for at-the-money SVXY March calls, puts, and straddles, all bought to open on the final trading day of the preceding year, and closed at intrinsic value on March expiration day.

There's no clear "winning strategy" here, although -- as might be expected -- straightforward SVXY put purchases have fared the worst, with three 100% losses among the group. Also unsurprisingly, the call purchases have delivered the biggest percentage gains of 361% (just this year) and 220% (back in 2013). Both of those big call winners coincided with double-digit rallies for SVXY from the start of the year into March expiration. Also worth noting is that the straddle strategy has delivered more losers than winners, but not a single 100% loss -- so we certainly can't accuse SVXY of being stagnant during this time frame.

But perhaps the March expiration date was cutting us off at the knees here. After all, it's the full 31-day stretch that delivers the outsized average returns detailed above -- and due to the way the calendar falls, March options expiration has more often than not landed squarely in the middle of the month during the past five years.

So, White pulled returns for all three strategies again, but this time purchased an April-dated option on the final day of February, then closed it out the final day of March -- giving us a "pure" play on SVXY's most supercharged month of positive returns. Additionally, this approach essentially clears the field of 100% losses in every category, given that the trades would be closed out with several weeks of time value remaining.

The call returns here are impressive, with three of the five emerging as winners -- ranging from "healthy" in 2013 and 2017 to "knocking the cover off the ball" in 2016. And the losses for the call play are fairly palatable, too, with this hypothetical trader losing no more than half his investment in the "worst-case scenario."

The straddle, meanwhile, was a near-total bust. Only one winner was generated, in 2016, when the massive call gain was sufficient to offset the put option's implosion. Similarly, the put strategy was an unmitigated disaster (with the aforementioned 2016 "implosion" yielding the closest we came to a total loss in this round of theoreticals).

Of course, the usual caveats apply here -- we're looking at a small sample size of returns, given SVXY's relative youth, and your results may vary quite a bit with a more active trade management style (versus our admittedly quixotic search for a "set it and forget it" option trade). But we can say with confidence that the true "no brainer" play here is to avoid buying SVXY puts ahead of March -- and for those seeking a more "actionable" move, an SVXY call purchase timed to coincide with historical March strength in the ETF offers a higher probability of gains than losses.

That said, one final caveat for prospective SVXY call buyers would be to watch the VIX closely during the early innings of 2018. The results outlined above were generated during the current, years-long "low VIX regime" -- so if volatility in the stock market begins to ramp up into a higher range, the fund's March winning streak may lose its "sure thing" status.

Today we are taking a closer look at volatility -- specifically, what it means when there is an abundance or lack of volatility, as well as the two primary types of volatility each options trader must know. In the simplest terms, volatility is defined as the propensity of the underlying stock's market price to change in either direction... but there's much more to the topic than that. Below, we will specifically dive into the differences between historical and implied volatility.

Historical Volatility vs. Implied Volatility

Historical volatility (HV) is a backward-looking metric that measures how much movement a stock has experienced over a certain time frame. HV is typically based on a stock's changes from close-to-close, whereas intraday swings are not priced in.

While there are several different methods by which HV can be calculated, it's most common to take the standard deviation of the difference between the stock's daily price changes, and compare it to the mean value of the stock during that same lookback period.

Implied volatility (IV) is a forward-looking metric that measures the market's best guess of future volatility over a certain time frame. This "implied" movement is a major factor that influences the price of an option. IV tends to rise ahead of scheduled events that could spark major stock moves, and then deflate after the catalyst has passed, in what is known as a "volatility crush."

What Does Volatility Mean for Options Traders?

Diving deeper and looking into the roles HV and IV play for options trading decisions, traders often compare a stock's HV to an option's IV, to determine whether or not options are pricing in a "fair" amount of future volatility over a given time frame. The time frames of HV and IV should be similar when comparing -- e.g., a 30-day HV to a 30-day option.

Option buyers should be wary when IV appears to be running much higher than HV, as that could mean options are overpricing volatility expectations. When the implied volatility is notably lower than the historical volatility, it may indicate an opportunity for option buyers to find relative bargains.

How We Measure Volatility

There are two tools our traders use internally that help us to analyze options prices and pinpoint the best option-buying (or option-selling) opportunities. The first tool is the Schaeffer's Volatility Scorecard (SVS). The SVS is a proprietary indicator that measures a stock's realized volatility versus the volatility expectations that were priced into that stock's options over the past 12 months. The goal of this backward-looking measure is to figure out which stocks have been the best and worst targets for option premium buyers. 

The second tool we use is the Schaeffer's Volatility Index (SVI), which is forward-looking. The SVI reflects the average at-the-money (ATM) implied volatility of a stock's front-month options, and we further quantify this reading by assigning it an annual percentile rank. This method is helpful to determine whether or not short-term options are currently pricing in high or low volatility expectations, relative to the past 52 weeks' worth of data.

Following suit with the record-breaking performance by stocks, many of our subscription trading services finished strong in 2017. In particular, though, our credit spread-focused Wealthbuilder program actually wrapped up the year with a perfect record, as every single trade recommended during the 12-month stretch expired a winner.

To find out more about this remarkable 100% win rate, we spoke with Schaeffer's Senior Market Strategist Joe Bell, who's been our lead trader on Wealthbuilder for years. Keep reading to get his pro take on writing puts in a low-vol environment, the best technical indicators for credit spreads, when to sell premium on both sides, and finding opportunities when fear is spiking.

With the stock market hitting record highs, is it fair to say that 2017 was a pretty "safe" year to be selling puts?

Joe Bell: The stock market hitting record highs might not be the best benchmark for the safety of the credit spreads in Wealthbuilder throughout the year. In fact, the hope for this type of strategy is that it is not correlated with the U.S. broad market's annual performance.

One major point to note is that the time frame for one of our trades is typically four to six weeks. When we are not in positions, the portfolio is in cash. The other important thing to remember is that this specific strategy trades options on ETFs across the asset spectrum. For example, this year some of the ETFs used were VanEck Vectors Gold Miners (GDX), Energy Select Sector SPDR (XLE), iShares Russell 2000 Index (IWM), SPDR S&P 500 ETF Trust (SPY), iShares Barclays 20+ Year Treasury Bond (TLT), PowerShares QQQ Trust (QQQ), and Utilities Select Sector SPDR Fund (XLU).

Each of these ETFs represent different segments of the market. Some of them performed poorly, and some performed well for the year. It came down to identifying times when I felt implied volatility was high, and times when I felt confident about the probability of the future price action of each ETF.

So, just looking at the overall performance of the broad stock market may not always reflect how well or how poorly a premium-selling strategy fared overall. This would depend on the short time frames and diversity of different ETFs traded throughout the year.

Were there any particular challenges with this strategy, expected or otherwise?

It was challenging this year because implied volatility is near historic lows. Some may think that with low implied volatility, it would make it less appealing to sell premium. The important factor to remember is that you're always looking for the relationship between implied volatility and your expected volatility of the underlying.

The other very important part of trading credit spreads and iron condors is which strikes you select and what your outlook is for the underlying. For example, if I sell an out-of-the-money put spread, I could be wrong about volatility. However, if the underlying security finishes above the strike I sold, I profit. It's like any other strategy and ultimately comes down to your ability to accurately predict future price action enough times to outweigh the times when you are wrong.

When researching potential credit spread trade candidates, what are you looking for in terms of technical support?

This really depends on the underlying instrument and the trade. In general, I will use trendlines, volume, price-level support and resistance areas, moving average convergence divergence (MACD), Relative Strength Index (RSI), and moving averages. In addition, I utilize candlestick chart patterns to identify times when buying or selling pressure is pent up or looks poised to move in one direction or the other.

Outside of technical indicators, I also look at option open interest and option activity around the certain strikes to identify areas where there could be future potential transaction volume that acts as support/resistance. Much of that is on the price side of things.

As far as implied volatility, I tend to see mean-reverting behavior. Often, when implied volatility reaches extremes, the eventual future volatility is less than it would imply. Using envelopes and/or Bollinger bands for implied volatility is one way to identify these tradable extremes.

You traded GDX credit spreads in January, and followed up with a GDX iron condor in March. What type of factors or indicators motivate you to favor one strategy over the other?

It really just comes down to my outlook for the underlying ETF or index. There could be technical drivers -- such as support/resistance, momentum indicators, and overbought/oversold signals -- and sentiment factors that might influence my analysis.

From an options perspective, it also depends on the relative value of calls and puts on that security. For example, sometimes put prices are much more expensive than call prices, so it doesn’t make sense to sell premium on both sides like an iron condor. 

You recommended a SPY credit spread on April 12 -- the day SPY closed below its 50-day moving average for the first time since the post-election rally in stocks began. What was behind that recommendation?

The 50-day moving average was still trending higher, which indicated the intermediate trend was still up. The ETF had been in a strong uptrend, though, and the close below this area sparked a lot of fear from many participants. SPY was also trading near its lower Bollinger band, which had signaled good and long opportunities during the past several months. Plus, the CBOE Volatility Index (VIX) was at its highest level in six months, and at nearly three times the value of the recent historical volatility.

We track bullish and bearish option activity on three major U.S. option exchanges, as well. Based on our data, the number of bearish puts bought to open during the previous 10 trading days outweighed calls by a ratio of 1.60. This is the type of fear and expensive premiums I like to sell into.

The good thing about this credit spread is that it doesn’t require you to be a day trader and pick the exact bottom on the exact day. I've sold a put credit spread that was nearly 4% below the current SPY levels. If the SPY continued its momentum lower, it still had plenty of other technical areas of support that might have brought buyers to the table.

Another SPY put spread was opened on Aug. 10, when the VIX shot up 44% to set its 2017 closing high. Were you betting the volatility spike -- largely driven by nuclear fears -- was overdone?

This was another example of the type of spikes in fear that you see in the market. The good thing for a patient premium seller is that these overly emotional reactions to things can present opportunities. All of SPY's major trendlines were moving higher, the uptrend was well intact, and it was trading just above its 40-day moving average. The ETF was actually only about 1% off its all-time high, and yet we saw a spike in implied volatility that sent option premiums to their highest levels in several months.

The $240 area was also a previous support area below the shares, which I felt could bring buyers to the table on any additional selling. The rate at which speculators were buying bearish puts relative to calls was also higher than 87% of the readings we had seen during the past year. Option premiums were very highly priced, and the opportunity to sell out-of-the-money put spreads were highly attractive at that point.

You had a couple of successful IWM spreads in 2017, too. What was the key to playing the small-cap tracker over the past year?

IWM lagged other market sectors in 2017, so entry points for trades had to be precise. The good thing, from a premium-selling perspective, is that IWM was in a nice trading range between January and August. So, its underperformance created some strong technical support and resistance levels that could be leaned on for collecting premiums. We did a successful IWM bullish credit spread in March when it was trading near the bottom of that range I mentioned.

The other position on IWM was an iron condor in January. The IWM had entered 2017 on the heels of an incredibly strong November rally of more than +17%. It was in the early stages of a trading range in January, and the initiation of the iron condor allowed us to capitalize and profit during a period where long-term investors would normally be sitting on the sidelines or holding positions that are flat. 

The S&P 500 Index (SPX) has surged nearly 4.8% so far in January -- and there's still more than a week of trading left -- on pace for its best month since March 2016, and its 10th straight monthly gain. However, even as U.S. stocks assail record heights, the CBOE Volatility Index (VIX) -- or Wall Street's "fear gauge" -- is also on pace for a big month, currently up 4.3% in 2018. This rare occurrence has happened just 12 other times in history. Below, we take a look at how the stock market tends to perform when both stock prices and volatility expectations are on the rise.

Most Signals Flashed During the Dot-Com Bubble

Specifically, the last time the SPX rose 3.5% or more in a month at the same time the VIX was positive for the month was in February 2017. Prior to that, you'd have to go all the way back to December 2003 for a signal, per data from Schaeffer's Senior Quantitative Analyst Rocky White. The majority of the signals flashed just before the dot-com bubble burst, with six occurring between June 1997 and March 2000.

Stocks Could Underperform in the Short Term

Following previous signals, the S&P tended to underperform in the short term, giving up 0.19%, on average, in the subsequent month, and higher just 41.7% of the time. That's compared to an average anytime one-month gain of 0.73%, with a win rate of 64.2%, looking at data since 1991.

However, three and six months after signals, the S&P 500 was higher 75% of the time, with average returns roughly in-line with anytime returns. One year after signals, the index outperformed, with an average gain of 10.23%, and a win rate of 81.8%. That's compared to an average anytime one-year return of 8.85%, with 78% positive.

In conclusion, when the S&P and "fear barometer" tend to soar in tandem, it's been yet another signal of short-term weakness and long-term strength for the stock market. Considering the historic run-up of stocks in 2018, not to mention signs of extreme optimism, those concerned that overbought stocks are due for a breather may want to heed founder and CEO Bernie Schaeffer, who recently noted that options hedges against a correction are priced to move.

Monday's broad-market sell-off sent the CBOE Volatility Index (VIX) up more than 115% -- its biggest one-day gain ever. As such, the VelocityShares Daily Inverse VIX Short-Term ETN (XIV) -- an exchange-traded note issued by Credit Suisse Group AG (NYSE:CS) that mirrors the inverse performance of VIX -- was down 14.3% at 99 when the stock market closed, and plunged more than 80% in after-hours trading.

Credit Suisse -- which is the largest holder of the ETN -- issued a statement saying the bank has not suffered any trading losses due to the XIV implosion. Nevertheless, the Swiss lender this morning set a redemption date of Feb. 20, for the volatility note, well ahead of the Dec. 4, 2030, maturity date.

Against this backdrop, CS stock fell 4% yesterday, and is down another 1.3% today to trade at $18.37. The shares are now testing their year-to-date breakeven mark, as well as their 40-day moving average -- a trendline that helped support the stock during a mid-November retreat.

Options traders in recent weeks have been bracing for even stiffer short-term headwind, too. In the last 10 sessions, the stock's February 19 put has seen the biggest rise in open interest, and Trade-Alert indicates mostly buy-to-open activity here. While the lifetime of these front-month options encompasses the financial firm's Feb. 14 earnings report, the bank stock has closed higher in the session after earnings in each of the past four quarters.

The CBOE Volatility Index (VIX) surged 115.6% on Monday -- its largest one-day pop on record -- as panic selling hit the U.S. stock market. And as inverse volatility notes plummeted while the Dow racked up its biggest two-day point drop to date, VIX options were in high demand, with volume hitting a record high on Friday and logging its second most-active trading day on Monday. Plus, according to Trade-Alert, total marketwide option volume of 35.5 million contracts was the third highest ever.

Drilling down, 4.33 million VIX options traded on Friday -- 3.23 million calls and 1.10 million puts. The February 25 call was most active, with 597,636 contracts traded. Data from the Chicago Board Options Exchange (CBOE) confirms 45,406 new positions were purchased here, as spot VIX climbed to an intraday high of 17.86, a level that, at that time, had not been touched since the day after the 2016 U.S. presidential election -- possibly as stock traders sought out portfolio protection.

More notably, though, is a massive six-way spread that involved rolling out 216K February 12 puts and a 1X2 February 15-25 call ratio spread to the March series. According to Trade-Alert, though, the volatility trader incurred a paper loss of roughly $23 million on Monday, as March VIX futures spiked to an intraday high of 28.90.

Meanwhile, 3.62 million VIX options traded on Monday -- 2.99 million calls, versus roughly 630,000 puts. It's a similar set-up today, too, with 3.42 million options on the tape, nearly three-quarters of which are calls. Similar-sized blocks of March 15 and 25 calls changed hands earlier alongside the March 12 put, and were marked spread. However, it's unclear if these positions are being opened or closed.

Earlier today, VIX printed above 50 for the first time since August 2015, as stocks plunged at the open. The market's "fear gauge" has since swung lower, though, with the stock market stabilizing, last seen down 1.5% at 36.75.

About two weeks ago on Feb. 6, the Cboe Volatility Index (VIX) broke out above the 50 mark for the first time since August 2015. This volatility explosion coincided with the worst week for the U.S. stock market in years. Since then, the market's "fear gauge" has retreated back to 18.41, though this remains well above its one-year average daily mark of 11.78. But amid this stock volatility, VIX call buyers have seemingly vanished.

Specifically, Schaeffer's Quantitative Analyst Chris Prybal noted that the VIX 20-day buy-to-open call/put ratio clocked in at 1.85 yesterday. While top-heavy on an absolute basis, it marked the lowest reading since Dec. 1, 2016 -- when the stock market was in the early stages of the Trump rally. This indicator topped out at a short-term peak of 5.12 on Jan. 12 -- when spot VIX was hovering around 10 -- meaning the VIX call/put ratio fell almost 64% over the past five-and-a-half weeks.

Prybal also pointed out that the current reading on the VIX premium settled at negative 20% on Tuesday -- marking the first discount since October 2016 -- and closed yesterday at negative 22%. The VIX discount marks the difference when spot VIX falls below the 20-day historical volatility of the S&P 500 Index (SPX), suggesting S&P options are pricing in lower volatility expectations over the next month versus its realized volatility in the four weeks prior.

It's been a wild ride for the U.S. stock market, with the Dow and S&P 500 Index (SPX) set to snap its longest monthly win streaks in decades -- and the Cboe Volatility Index (VIX) on track for its best monthly gain since August 2015. Amid this volatile trading environment, the VIX premium moved to a discount for the first time since October 2016 last week, and has since swung to a more extreme reading.

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 40.2%. According to Schaeffer's Quantitative Analyst Chris Prybal, this is just the third time ever this volatility signal has flashed.

Most recently, the VIX discount fell below negative 40% on July 20, 2016, and before that, you'd have to go all the way back to Nov. 4, 2008 -- the height of the Great Recession. The subsequent returns for the S&P 500 aren't pretty, though the numbers are skewed by the 2008 results. In fact, through all time frames out to six months, the SPX has averaged a negative post-earnings return.

The VIX, on the other hand, has averaged a positive post-signal return going out four months. Most notably, at the two-week mark, the market's "fear gauge" was up 25.5% in the 10 days after the VIX discount hit negative 40%.