Sunday, February 11, 2007

7% Friday VIX Spikes

So the VIX jumped 7% on Friday. Considering that the VIX also managed to set a new low for the 100 day SMA for the 34th consecutive day, it is a little early to declare the recent period of low volatility to be over. Still, Friday’s move warrants closer inspection.

Looking at how the VIX has bounced back from sub-10 closes, the current 11.10 reading is right in the lower middle of the range for where we “should be,” based on historical precedent 13 days removed from the 9.89 close on January 24th.

Is a 7% spike in the VIX unusual? Not really. It happens about once every two weeks, on average. Interestingly, a 7% jump occurs just 5.2% of the time on Fridays, but 10.2% of the time on any other day of the week. Monday sees the most volatility, a subject I will tackle in this space in the near future.

Getting back to the 7% rise on Fridays, as the adjacent composite graphic shows, there is typically a small (0.6%) follow-through on the day after the +7% Friday, with a gradual lessening of volatility over the course of the next 1 ½ weeks. The data for the high closes over the two weeks following these 45 Friday 7% spikes also supports the idea of the Friday spike and Monday follow-through as being the high point in this sequence is: fully 27% of the time, the Friday closed held up as the high close over the next two weeks; another 20% of the time, the Monday close turned out to be the high close during this period.

Going forward, keep in mind that many VIX spikes run out of steam 2-4 days after the initial move, so if Wednesday’s retails sales numbers or Bernanke's testimony does not put a scare into the markets and keep them on edge, the VIX spike will likely already have been trampled by the next bull leg.

For now I am slightly bearish on the VIX, with a close eye ready for the Tuesday-Wednesday action.


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