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Tuesday, January 8, 2013

Historic VIX move

Last week saw the biggest one week decline in the VIX ever.  Here is a summary of the biggest up and down moves.


Does the meltdown in the VIX tell us anything about the coming year?  What happened after prior large declines.  Lets look at the charts and see what they say.

Here is the 1991 instance.

Oddly, SPX actually declined slightly during the 1991 plunge in the VIX.  That plunge ended at 14.90.  SPX had just made a new all time high a couple of days before the drop.  This was much different then the other occurrences.  The market chopped around quite a bit in a low volatility state afterwards.  We can see several price tests slightly below the SPX level on the week of the plunge.  However, nothing major happened in either direction for the next few moths.  It really was just an overall drop in the real volatility.

Here is the chart from 2001.

This was after the 9/11 attacks when everybody realized it was not the end of the world.  Even after the big drop, the VIX was still almost 32.  The market continued on up over the next few months.

Lets look at the chart from 2007.

This plunge occurred after a significant spike up in the VIX to over 37.  After the drop, the VIX was 20.72.  SPX continued up to test the prior highs from July of that year.  That test turned out to be a failure and the end of the bull market. 

Last but not least is the 2011 chart.

The VIX ended this plunge at 17.90.  It was up over 31 during the sell off in SPX.  The market continued higher over the next few weeks, but volatility picked up again dramatically a few months later.

Here is the current chart for comparison.

This chart is a bit different then the other ones.  SPX was not oversold like all but the 1991 occurrence.  However, unlike 1991, it made a big move up

In the prior four instances of a major VIX plunge, SPX continued at least a little higher over the next month.  The current drop took the VIX to the lowest level from any of the plunges (13.83).  The VIX values around the drop most closely resemble the first occurrence from 1991.   It looks like a lot of people hedged their longs in case there was no deal.  They took off those hedges last week when the deal materialized.  Is the market now going to continue up like it did in the month after other VIX plunges?  Is this a sign that earnings are going to be ok and there will be nothing negative out of Washington?  Now that everybody removed their hedges, is the market vulnerable should earnings come in worse then expected?  This situation is just enough different than the others that I don't know if past history is a good guide or not.  If it is, then buying dips for the next few weeks would be the way to go.



Anonymous said...

I like your objective analysis. Thanks for sharing.

Traderbob58 said...

Thanks. Just keep in mind that just about everything I point out lately has not worked as it did historically.



The information in this blog is provided for educational purposes only and is not to be construed as investment advice.