What Does The VIX Tell Us?

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Includes: IVE, IVV, SDS, SH, SPHD, SPXU, SPY, SSO, TVIX, UVXY, VDVIX, VEVIX, VIVIX, VIXH, VIXM, VIXX, VIXY, VMVIX, VOO, VXX, WAVIX
by: Value/Fundamental Investor
Summary

The VIX has been a leading indicator for the S&P on several occasions.

The market had a big down day on Wednesday, but there may be relief coming.

The strong bull market should continue next week.

2017 has been a year like no other in the markets. There has been widespread complacency across all markets amidst significant external and internal risks. The S&P has broken out from strong domestic and global economic recoveries and returned around 20% over the past year.

Chart ^SPX data by YCharts

There has been a clear upward channel with small, but insignificant, corrections along the way. There have been many events that at the time were thought to possibly influence a correction, but the market has recovered every time. The CBOE Volatility Index (VIX Index) is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. The VIX has been in record low range and has stayed there for extended periods of time.

Before 2017, there were only nine days that the VIX closed below 10. So far this year, there have been 34 days where the VIX closed below that level. This shows the overwhelming complacency that exists in the market today. While there have been a few spikes in the index, often times they are short-lived and followed by an equal drop.

In the past year of trading days, the VIX has risen 10% or more on 12 different occasions. In eight of those 12, the following week has seen the S&P 500 rise, with an average of .93% over the five-day span. For example, September 5th, the VIX closed 20% higher than the previous trading day. Monday of the next week the S&P closed 1.08% higher and continued to be green most of the rest of the week. Now, this is just one example but there were seven more instances of this throughout the year.

Chart
^VIX data by YCharts
Chart
^VIX data by YCharts
Chart
^VIX data by YCharts

These charts show how the market has reacted to panic this year. There has been initial selloffs to go with the spike in the VIX, then investors seemingly forget about the risks they perceived just a few days ago and buy back in.

This past Monday, the VIX had a one day gain of 11.03% from $9.97 to $11.07. With no significant negative macroeconomic events, there is reason to believe the S&P will be green again next week. This is no guarantee of a positive week but the historical data shows it has happened that way in the past.

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.