Is The VIX Indicating A Market Bottom?

|
Includes: DIA, IWM, QQQ, SPY, VIXH, VIXM, VIXX
by: Matt Margolis

Summary

Spikes in the VIX over the past 5 years have been closely correlated to market tops.

In October 2014 the VIX spiked to 31 the week of October 13th while the S&P bottomed at 1820 the same week.

In October 2011 the VIX spiked to 48 while the S&P bottomed at 1075 the same month.

The VIX spiked Monday to 53 while the S&P fell sharply to 1867, or 12.5% below May 2015 all-time highs.

Waking up and seeing DOW futures down over 900 points is not the way you want to start your week. Fortunately, the Monday morning downdraft was relatively short lived. The positive from Monday morning's plunge is that it helped clear out a lot of bullish sentiment in the marketplace. The market has been trading sideways for the first 7 ½ months of the year but failed to "flush" the markets.

The market can be flushed by months of sideways trading or it by a traditional correction. We have already witnessed several stocks complete a full correction cycle of highs but the broader market had yet to correct. Monday morning tech leadership shares fell hard in the early morning. Shares of Apple (NASDAQ:AAPL) fell to $92, or 31% off its all-time high reached in April. Skyworks (NASDAQ:SWKS) fell to $71 or 37% off its high while Qorvo (NASDAQ:QRVO) fell to $45 or 49% off June all-time highs. Oil continued to struggle and briefly fell below $38 a barrel before recovering back above $38 per barrel.

The biggest question on my mind is when will this sell-off end? I don't think anyone knows for certain but one metric that has proven to indicate the last 2 bottoms is the VIX. The last two market sell-offs occurred in October 2014 and August through October of 2011.

The VIX spiked and traded between 44 and 48 over the three-month period between August 2011 and October 2011. The S&P dropped 21% from May 2011 highs of 1370 and bottomed in October at 2011 at 1075 before climbing back to 2020 in September 2014 over the next four years.

The VIX spiked to 31 the week of October 13th, 2014 and the stock market fell 15% off its September 2014 highs to 1820 the week of October 13th, 2014. The market jumped 8% the following week and continued to march higher to make new all-time highs of 2134 on the S&P in May of 2015.

On Monday the S&P fell all the way down to 1867, which amounts to a 12.5% decline. On Monday the VIX jumped to 53, the highest level over the last 5 years and the highest level since October 2014 (last bottom) and October 2011 (next previous bottom).

At this point we can only hold tight and wait for the market to finish its correction. The VIX is telling me the market will likely bottom over the course of this week. If recent history has any value at predicting the future the S&P will like recapture the 2000 level by end of next week after it jumps 8% off today's lows. Time will tell and it's only Monday, but it has already been an interesting week.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.