What happens to the U.S. stock market after VIX soars 40% in 1 day


VIX soared 46% on May 17. Some investors think that VIX will spike again and the S&P will fall again. Are they right? What does history say? Here’s what happens historically after VIX soars more than 40% in 1 day.
*We’re using VIX’s close vs the previous day’s close.
*Interestingly enough, VIX never soared more than 40% a day during the 2007 – 2009 or 2000-2003 bear markets. This is because VIX will only soar 40% when investors suddenly become fearful. In a bear market, the level of fear gradually builds up. There are a lot of days when VIX rises 10%, 20%, or 30% in a bear market, but never a day when VIX rises 40%.

August 21, 2015

As you probably know, the S&P crashed 5.2% the next day on August 24. But the significant correction did not end there. 4 months later, the significant correction’s selling began again, bringing the S&P 500 down 13%.

April 15, 2013

This was an interesting case. VIX soared when the S&P made a 3.8% pullback. Then the S&P continued to rally before making a small correction. By the end of the small correction, the S&P 500 was around the same price as on April 15.

August 8, 2011

This was the bottom of the crash in early-August 2011. However, this was not the bottom of the significant correction. The S&P 500 made a marginal new low the next day, bounced, and then made a new low in early October 2011.

February 27, 2007

This was another interesting case. VIX spiked AFTER the S&P completed a small 6.6% correction. After this VIX spiked, the S&P continued to rally until mid-July 2007. The next small correction of July-August 2007 brought the S&P down to its levels in February 2007.

February 4, 1994

VIX soared on the first real down-day of 1994’s significant correction. Then the significant correction began in earnest.

November 15, 1991

VIX soared in the middle of a small 6.7% correction for the S&P 500. The S&P fell a little more over the next few days before bottoming.

July 23, 1990

VIX soared during the first leg of 1990’s significant correction, which our model predicted. After pausing for a few days, the S&P continued to collapse.

Conclusion

As you can see, it’s rather rare for VIX to spike more than 40% in one day. This phenomenon happens under a range of conditions.

  1. During a significant correction. It can happen at the beginning of a significant correction or near the end. However, VIX never soared 40% on the last day of a significant correction.
  2. During pullbacks. After VIX spikes 40%, the S&P continues to rally. However, the eventual correction always brought the S&P 500 down to where it was at when VIX spiked.
  3. When the S&P 500 was in the middle of a small correction.

What does this mean for today?

We don’t think a significant correction will occur because our model does not foresee one right now. However, we know that this is one of the longest small rallies of all time. Hence, a small correction is overdue. We don’t know when this small correction will start or if it has already started. Perhaps the S&P will go up a little more before beginning a small correction. Who knows.
But if this VIX study is of any indication, the S&P will at least fall back to its level on May 17, 2017 when VIX spiked.

Leave a Comment