VIX vs. S&P Over the Past 20 Years
VIX vs. S&P Over the Past Three Years
Market Volatility on the Edge
Is market volatility running high? … or is it running low
(maybe too low)?
I've read several news articles just this week saying the
market is increasingly volatile. I've also seen analyses
expressing surprise that volatility hasn't jumped higher as the
S&P has slid 7.2% from its September high.
The answer is that volatility-as measured by the CBOE
Volatility Index (VIX)-is right now on the borderline between
historical "high" and "low."
The VIX is based on S&P options, where option pricing
reflects traders' volatility expectations. When options are
expensive (relative to stock price, etc.), it means traders are
betting on high volatility; when options are cheap, it means
traders are betting on low stock volatility. The VIX index
quantifies what volatility traders "must be" expecting.
Analysts generally use the VIX as a measure of investor
sentiment. High VIX reflects high uncertainty. And because
markets are usually more volatile when prices are falling, a high
VIX can also suggest high expectations for falling prices.
A low VIX means low expected volatility, which is more
associated with expectations of rising prices.
What's high and what's low depends on the time span you
consider. The 20-year chart below shows four alternating VIX
eras; low from 1993 to 1996, then high from 1997 to 2003, then
low again from 2003 to 2007, and back to high from 2007 on. The
dividing line between high and low is in the area of .14 to .18.
The VIX is currently at .16, right in that boundary zone.
Relative to the "high" VIX era that started in 2007 (ranging
all the way from .14 to .80), current volatility is very low.
Even setting aside that astonishing VIX spike up to .80 in late
2008 (the height of the financial crisis), current readings are
at about one-third the levels posted in short bursts in 2010 and
The second chart takes a closer look at the last three years.
It shows four occasions when VIX dipped down to (and a little
below) the current level.
The first low was in April 2010, followed by a sharp spike as
the market corrected for three months. The second low was in
April-May 2011, again followed by a VIX spike as the market
corrected for five months. The third occasion was in March 2012,
followed by a less dramatic VIX rise as the market corrected for
two months. The final VIX low of these three years was in
September 2012, and the market has pulled back for the two months
The VIX has been rising as the market retreated over these
last two months. But it hasn't risen very much, and it's still in
that borderline zone between high-eras and low-eras. For now
(until proven otherwise), the presumption has to be that
volatility is still low in a continuing high-VIX era, rather than
(potentially) high in a new low-VIX era.
What does it all mean? Simply that additional market weakness
is unlikely unless/until either (a) VIX spikes higher again, or
(b) the market enters a new low-VIX era by sliding down below the
boundary zone to about .14 to .16.
Your guide to ETF investing,
Cabot ETF Investing System
The Market is a Casino
Prediction, Probability & Knowability
Taming The Volatility Beast
Sign Up FREE for the Cabot Wealth Advisory