The VIX Index, often referred to as “fear gauge”, is a market-based measure of expected volatility for the S&P 500 Index. Before the US stock market open this morning, the VIX index reached a level of 65.39, and my hopes for a quiet summer vacation were quickly dashed. A VIX greater than 65 has only been seen twice in the history of the index going back to 1990: briefly in the depth of the Global Financial Crisis (GFC) and very briefly during the COVID-19 market sell-off. Even more stunning, a VIX of 65.39 represented a roughly 41-point increase from last Friday’s closing level of 23.39, which would have marked the largest 1-day increase ever. At the time of this writing, the VIX is trading at 34.66, which still represents an impressive 11.27 1-day increase, sitting among the 0.1% largest 1-day increases in history.
Source: CWA, Bloomberg, as of 8/5/2024
Source: CWA, Bloomberg, as of 8/5/2024
Regular readers of our notes will know that high levels of the VIX tend to offer attractive buying opportunities for stocks. The same can also be said for large increases in the VIX. The table below reports the average forward returns of the S&P 500 Index following days when the VIX index experienced significant 1-day increases. In addition to 1-day increases larger than 11 points, we studied 1-day increases larger than 4.5 points. This allowed us to study a somewhat larger sample, since those types of increases have occurred 1% of the time instead of just 0.1% of the time. The results are directionally consistent: larger 1-day increases in the VIX tend to be followed by greater S&P 500 returns over the next 3, 6, and 12 months.
Source: Source: CWA, Bloomberg, as of 8/5/2024
Whether or not this market sell-off has further to go remains to be seen. However, history shows that those who are brave enough to stay the course or even commit fresh capital during such turbulent times are usually rewarded handsomely. As the saying goes, “be greedy when others are fearful”.
Sauro Locatelli CFA, FRM®, SCR®
Director of Quantitative Research
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