Moby Waller: The CBOE Volatility Index (VIX) (NYSE:VXX) (NYSE:VXZ), which measures the implied volatility of S&P 500 Index (SPX) (NYSE:SPY) options, had a big rise on Wednesday due to the market pulling back. Day-over-day the VIX closed 18.45% higher to end at 18.30. While on a real basis we’re still within the lower range we’ve been in throughout 2011 (more on this later), on a 1 day percentage basis these kinds of moves are fairly unusual.
I took a look back at VIX data since the beginning of 2004 using new methodology VIX data from the CBOE website. We’re looking for previous 1-day VIX spikes over 15%. There have been 57 of these since 2004, an average of 7.7 per year — so far in 2011 there have been 5 of these (but 2 of the occurrences were back-to-back and we combined them below).
Breaking it down into the 1 year period from June 1, 2010 to to June 1, 2011 there have been 6 VIX spikes of 15% or more (ignoring the one on Wednesday). We’re using 5 instances for the data analysis below however, because there were VIX pops on consecutive days of March 15 & 16 this year which we combined for performance analysis.
In this small but timely sample some interesting numbers jump out:
SPY Performance Following 1 Day VIX Spikes > 15%
You can see above that the S&P 500 tracking ETF (NYSE:SPY), known as the SPYders, have moved higher on average following such a move in all 3 time frames looked at — 5 trading days later (a week), 10 (2 weeks), and 20 (a month). The key that immediately jumps out to me is the outperformance in the 10 day time frame. In none of the 5 samples was the market lower 2 weeks after the VIX spike. And the average gain in this time frame was a very healthy 3.7%.
Now, we take into account what the market has done in this June 2010 to June 2011 time frame to see these numbers in perspective. We broke down the average performance of the SPYders over these 5, 10, & 20 time frames based on its culmulative gain in the time frame measured. Note again here the relative strength after such a VIX spike “signal” over 5 and 10 trading days, but a net underperformance over 20 trading days.
The bottom line over the past year is that the market tends to rally for the 2 weeks following such a VIX pop.
But where does the VIX stand on the chart after the big % move higher. Well you can see on the chart below that although we had a big percentage pop, on a real basis the VIX is still (for the time being) well within its recent 15 to 19ish range. Additionally, we haven’t spiked to the Top Bollinger or Acceleration Bands yet, so there’s every reason to believe at this time that any further VIX upside will be capped in the 19/20 area.
VIX Daily Chart
In sum, if one looks at past occurrences over the past year, the market looks likely to rally in the 2 week time frame heading into mid-June. Doesn’t look like today’s market down move and VIX spike is anything to be seriously worried about at this point.