VIX Backs Down from the Edge
S&P should follow its lead with a loss, but then outperform historical averages.
In the chart below, which I borrowed from the subscriber newsletter, I offer some data to help put the current decline in an appropriate historical context.
Prior to the streak that ended last Friday, the only other time that the VIX fell for 10 consecutive days was in April to May of 2005. At that time, the bull market was just beginning to pause for a month and it was not until six months later that bulls began to reassert themselves.
Looking at the other fifteen instances in which the VIX fell at least seven days in a row, a pattern emerges in which following the VIX streak, the S&P 500 Index has a tendency to post a slight loss for a week or so, then significantly outperform the historical averages ("census") for the balance of the periods studied, from 10 to 100 trading days.
In terms of adding an interpretive narrative, think of a streak of the VIX declining for seven or more days in a row as a signal that the markets are recalibrating volatility expectations and paving the way for further advances in an environment of diminished risk. Of course the caveat is that a week or so of mean reversion (i.e. an increasing VIX and a declining SPX) usually serves as a transition from the streak of VIX declines to an extended period of above-average stock market returns.
For a related post, readers are encouraged to check out Streaking – an early VIX and More classic and also an official "lighter side" selection.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Daily Recap Newsletter