I did a study on Tuesday which demonstrated what happens next when volatility returns to the stock market.
The conclusion to that study was simple:
Most cases saw a little more downside for the S&P 500 over the next 1-3 weeks (i.e. only a few cases were positive throughout the entire next 1-3 weeks). HOWEVER, the stock market usually trended higher over the next 1-3 months after VIX spiked the way it did today.
This study suggests that the stock market’s short term downside is limited, and that the medium term outlook is bullish.
Yesterday: VIX spikes more than 25% from under 15 AFTER VIX was above 20 less than 6 months ago.
Today: VIX fell more than -10%
Here are the S&P 500’s forward returns.
Click here to download the data in Excel
Here are the 5 historical cases in detail.
September 12, 2016
The stock market faced a little more downside over the next 2 months, and then soared.
July 18, 2014
The S&P 500 swung sideways over the next 3 months, making a “small correction” from September-October 2014. It eventually trended higher.
April 16, 2013
This signal occurred when the S&P 500 was in the middle of making a small pullback. The stock market trended higher over the next few months, even though there was a 6%+ “small correction” along the way.
February 26, 2013
This signal occurred when the S&P 500 was in the middle of making a small pullback. The stock market trended higher over the next few months.
November 18, 1991
The stock market’s downside was limited after this signal came out. The S&P 500 trended higher over the next year.
Once again, this study demonstrates that the U.S. stock market has some short term downside risk. However, this short term downside risk is limited, so the medium term outlook is bullish.
Click here for more market studies.