The S&P 500 is coming off its worst week since 2008. With the drop in stocks, we’re naturally seeing the Volatility Index (VIX) stay at an elevated level. During short corrections in equities we typically see a quick drop lower in the VIX as traders begin to realize the brief dip would be short-lived and expectations of future volatility begin to get priced lower. But what about when volatility stayed elevated?
Going back to 1990, when the VIX first began being reported, there’s been just a handful of occurrences of it staying persistently elevated. Of course there are multiple ways to measure this but the method I’m using today is a simple 5-day average of spot VIX. Going back 30 years, there have been seven previous clusters of the one-week average VIX crossing above 35 before the current instance we’re experiencing today.
What stands out during these periods, while it goes without saying the same size is extremely small, is the market continued to experience some weakness, at least in the short-term. Just one time (November 1997) did the S&P 500 not continue to fall or the VIX continue to rise. Each of the other six occurred prior to the final low in the equity index with the VIX often holding above 25. As the chart shows, the last time this occurred was back in 2011 and 2010, each seeing a brief period of further decline in stock prices before a final low was set.
Based on this study (albeit its small sample), I believe there’s still a heightened risk for the U.S. equity market. When will the likelihood of a test of the prior low diminish? I wrote about this last year after the Q4 ’18 decline, looking at historical market declines of at least 15% and how much price has to move higher before the chance of another leg day was minimized. As always, I keep an open mind to the changing data and will share my analysis weekly in my Thrasher Analytics letter.