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Revisiting ‘VIX Drops, Market Hops’ at Trader’s Narrative





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A while ago, I shared an interesting tidbit about the VIX. Apparently, when the volatility index drops by 10% or more in a day, it bodes well for equities. Historically on average, the S&P 500 is higher in the next 10 trading days.

Well, it has been 10 trading days since the VIX fell by 10.71% (May 25th 2006). Lets see how the S&P 500 has done since then. On May 26th, the SPX opened at 1272.71 and today it closed at 1257.93 (after recovering in from a much deeper decline intraday). So the VIX signal didn’t work this time :(

VIXdropsRevisit.png

But the VIX did soar intraday to levels that it hasn’t reached in quite a while. In fact, you would have to go back as far as March 22nd 2004, to find the VIX at similar heights. Although most data services are reporting the VIX as having reached an intraday high of 22.59, this is probably a bad tick or error. According to the CBOE, the VIX’s intraday high was only 20.75

When you take a longer point of view, such differences are meaningless. What becomes clear though is that volatility has finally broken the multi-year down trend and is now testing the heavy resistance (previous support) at the 20 level.

VIXmonthly.png

What implications does this have for the wider market? will volatility successfully break through the resistance and go even higher? does this mean that we are about to enter into a cyclical bear market? Honestly, I have no idea. But these are the sort of things this recent market action is making me ponder.

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