Is This VIX-plosion 'The Big One'?

A look back at VIX-mas weeks since 1993

Jan 6, 2015 at 8:21 AM
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Newsflash: The CBOE Volatility Index (VIX) is officially overbought! No, this isn't one of those holiday reruns -- we're back with new episodes here. VIX closed 20% above its 10-day simple moving average (SMA) yesterday. That marks a very quick return to overbought, as we just hit the threshold on Dec. 10.

I now count episodes as separate if VIX closes underneath the 10-day at some point after it closes 20% above. And that happened on Dec. 17, so the VIX stability lasted all of 2.5 weeks. If it feels like these pops are happening with greater and greater frequency … that's because these pops are indeed happening with greater and greater frequency. It's the fifth "official" pop since July 17 of last year.

The timing is also somewhat unusual. The first big leg took place over Christmas week, a time we generally associate with anything but volatile markets. But alas, that's a misperception. Realized volatility tends to lag around holidays, but VIX itself lags ahead of holidays. By Christmas week, it has often discounted the "time" loss and started pricing in January volatility.

Here's a look at VIX-mas weeks dating back to 1993, and then the performance of SPDR S&P 500 ETF Trust (SPY) going forward one month.

Christmas Week VIX vs. SPY since 1993

Not counting this past VIX-mas week, VIX rose 18 times in 21 years, with an average pop of 7.91% and a median pop of 9.74%. On any random four-trading day stretch, VIX is essentially flat (average 0.6% and median -0.49%), which makes sense. It doesn't appreciate over the course of time -- it's a mean-reverting statistical calculation.

What's more, there's effectively no correlation between the Christmas four-day VIX move and the SPY move over the next month (0.02). Nor is there any correlation between any four-day VIX move and any SPY move one month forward (0.04).

So on the surface, we shouldn't have any particular worries about the current VIX pop. But, it is important to note that this marks the largest VIX-mas pop ever. We lifted 33.61% -- and that doesn't include yesterday's VIX-plosion.

We're kind of in uncharted territory in the sense that this pop coincided with the changing of the calendar. We also have to wonder whether we have indeed crossed over from a low-VIX regime to a high one.

We won't know the true answer to that for a while, though. For now, you know the drill. Freak out over the "Big Bad Stories" out there now (euro and oil would lead the pack). Obsess over every tick for a week or so, and then move on to the "discounting" phase. Rinse, wash, and repeat.

One of these will be "The Big One." Maybe 2014 oil is 2008 financial. It's not likely, but anything's possible.

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.


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