Yesterday we looked at the return of stock market volatility and said that “Spikes in volatility are usually larger than this, so perhaps the stock market will experience some more short term weakness.”
Today the stock market went down a little more and volatility increased a little more.
VIX has increased by 29% over the past 2 days, while still being very low (i.e. below 20).
Historically, the stock market’s 1 year forward returns are rather bearish. The bearish cases saw only small losses (all less than -3%).
As I said yesterday:
As you can see, VIX has spiked from an extremely low $. This tends to happen AT LEAST 1 year before the end of a bull market (i.e. the rally still has some room to go). Why?
Because volatility tends to INCREASE during the last rally of a bull market. Volatility and the stock market tend to go up together. Volatility isn’t usually this compressed when the stock market tops.
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