Only a week after I commiserated over the ultra-low volatility market environment we have been experiencing for the last several months, markets handed us a massive surge in volatility with a nearly 400 point drop in the Dow Industrials and a stunning 46% surge in the $VIX:
Single day VIX surges of more than 45% are far from common and before today these outsized VIX spikes could be counted on one hand (today was the 6th single day spike of 45% or more in the VIX):
Several things stand out about the above dates and the forward returns for the S&P 500:
- These large $VIX surges often occurred at, or very close to a tradable low in the S&P 500.
- A period of increased equity market volatility often followed these large one-day $VIX spikes.
- Today's 46.38% surge in the VIX came from the lowest previous day's close of any of the above 40%+ spikes.
- All of the above VIX spikes saw positive forward 5-day returns in the S&P 500 and very strong average 20-day returns for the S&P of 3.11% including a 6.66% return last summer.
The takeaway is that large surges in the VIX often turn out to be short term buying opportunities in equities, however, today's market action is also likely to be a warning that we have just entered a higher volatility market paradigm for the foreseeable future. Moreover, a 15 handle on the VIX is not high by historical standards. In fact we have typically seen the VIX surge to above 20 before fear was sufficiently elevated for a sustainable low in equities to be put in place.
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