The CBOE Volatility Index (VIX) spiked 12% yesterday, for the largest one-day jump since early November. It was also beneath the 11 level before the spike, something that happens less than 2% of the time. With volatility historically low, could yesterday’s spike be the start of higher volatility?
Last week, we laid out how slow things have been for equities, and one thing to remember is volatility tends to ebb and flow, and never stays in one place too long. This all supports higher volatility happening some point later this year, if not much sooner. First things first: how likely is a bottom in the VIX during January? Going back to 1990, the VIX has bottomed in January four times; only July and December have seen the ultimate calendar year low in the VIX more often. Then notice how the VIX has never bottomed in February, likely increasing the odds of some volatility next month.
What about what the VIX does during the average year? Going back to 1990, the VIX tended to bottom in the summer months, spiked into October, and then drifted lower into the end of the year.
What does a low VIX mean for equities? Per Ryan Detrick, Senior Market Strategist, “Although most investors think a ‘low VIX’ is bearish for equities, this may not be the case. In fact, historically low volatility has resulted in higher future equity returns than a higher VIX does. That one surprises most people.”
Last, the calendar would suggest the VIX could make a low here, while trading beneath the 11 level is also another sign of extremely low levels of volatility that will likely increase. The good news is history would suggest a VIX beneath 15 is actually a good thing for equities and increases the odds of this bull market turning eight, even if volatitly also increases later this year.
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The VIX is a measure of the volatility implied in the prices of options contracts for the S&P 500. It is a market-based estimate of future volatility. When sentiment reaches one extreme or the other, the market typically reverses course. While this is not necessarily predictive, it does measure the current degree of fear present in the stock market.
The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries
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