Study: what happens next when volatility returns


The stock market’s volatility index (VIX) spiked today from a very low level (from less than 14 to 17).

This study looks at what happens next to the S&P 500 when VIX spikes more than 25% from under 15.

Here are the S&P 500’s forward returns for the next 1 week, 2 week, 3 week, 1 month, and 3 months.

Click here to download the data in Excel.
But as always, we need to apply context to market studies. The recent spike in volatility (VIX) has occurred after a recent and bigger spike in January-February 2018. In other words, today is the “return” of volatility.
To further refine this study:

What happens next to the S&P 500 when VIX spikes more than 25% from under 15 AFTER VIX was above 20 less than 6 months ago.

Here are the S&P 500’s forward returns. Notice how the forward returns are more positive.

Click here to download the data in Excel.
Here are these 10 historical cases in detail
August 17, 2017
The stock market went up after this signal.

September 9, 2016
The stock market faced a little more downside over the next 2 months, and then soared.

June 29, 2015
The stock market made a “significant correction” in the next few months after this signal came out. The Medium-Long Term Model predicted the significant correction.

July 31, 2014
The S&P 500 swung sideways over the next 3 months, making a “small correction” from September-October 2014. It eventually trended higher.

July 17, 2014

January 24, 2014
The stock market was in the middle of a 6%+ “small correction”. The downside was limited, and the stock market’s rally soon resumed.

April 15, 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 25, 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.

February 16, 1993
This signal occurred near the market’s bottom. The S&P trended higher over the next several months in a choppy manner.

November 15, 1991
The stock market’s downside was limited after this signal came out. The S&P 500 trended higher over the next year.

Conclusion

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.

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