Study: SKEW has spiked. What this means for stocks


The CBOE’s SKEW Index measures potential risk for the financial markets over the next 30 days. When the SKEW Index spikes, conventional “wisdom” assumes that there’s a greater chance of a “black swan” event occurring in the financial markets.
The SKEW Index typically ranges from 100 to 150. The higher the value, the greater the chance of a “black swan” event.
The SKEW Index has spiked recently.

SKEW has existed since 1990. As you can see, this indicator has plenty of problems. SKEW spikes aren’t consistently bearish for the stock market.
*We define spikes in “SKEW” as readings above 140.

It spiked in June 1990, just before the stock market’s “big correction” which began in July. This SKEW spike predicated the decline in stocks.

SKEW spiked in October 1998, AFTER the S&P 500 completed its “big correction” and had already bottomed.

SKEW spiked in March 2006. The S&P 500 continued to rally over the next 1.5 years, although there were “small corrections” along the way.

2014-present

SKEW has been consistently higher from 2014-present. The SKEW’s track record as a bearish sign is not good. SKEW has been consistently higher while the S&P 500 has trended higher.

Readings above 150

The SKEW Index is currently above 150. There have only been 4 other times in which SKEW exceeded 150. The S&P 500 typically went higher in the next few months when SKEW spiked.
October 15, 2015

June 28, 2016

March 17, 2017

October 17, 2017
As you can see, stocks go up in 5-6 months.

Conclusion

A lot of financial “wisdom” and widely accepted beliefs are wrong when looked at in the light of data. One of these is SKEW, which spiked recently. A spike in SKEW is not consistently bearish for the stock market.
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2 comments add yours

  1. Hi Troy,
    As always, THANK YOU!
    🙂
    I do (for once) have a comment: on the skew study (and similar data studies). The recessions are marked in grey. But we aren’t really interested in “official” recession starts and ends…we’re interested in market drops. It would be more interesting to have the market graph interposed on data like this. Then it would be easier to see if (eg in this case), the skew fell noticeably before the market crashed, or at the same time, or whatever.
    Either way, thank you for bringing up things to look at which I’ve never seen before!

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