As I mentioned yesterday in VIX Follows Markets Down in Early Trading, it is rare for the VIX to drop when the S&P 500 is down and rarer still for the VIX to be down when the SPX is down 1% or more. In fact, when the SPX closed down 1.15% yesterday and the VIX ended the day down 0.77%, it was only the second time since April 2003 that the VIX gave up ground on a day in which the SPX lost more than 1%.
Looking at all 22 times since 1990 in which the VIX has been down on the same day that the SPX has posted a 1% loss yields an interesting clustering of data. The first 10 instances are clustered in 1990 and early 1991 and are associated with all of the uncertainty leading up to the Gulf War. After a nine year hiatus – the famous 1990s bull market – the next clustering of data consists of ten instances from May 2000 through April 2003, roughly from the beginning of the bursting of the dot-com bubble to the point where the markets began to confirm a bottom with a series of higher highs.
The most recent example of the VIX falling on a day in which the SPX was down 1% or more comes from January 4, 2005 and was largely the result of the fallout associated with the magnitude 9.3 Indian Ocean earthquake. This was the second largest earthquake ever recorded (at least on a seismograph) and together with the resulting tsunami, was responsible for over 200,000 deaths.
It remains to be seen whether tectonic forces were responsible for the unusual VIX and SPX action yesterday. History suggests that these days can occur at either the beginning or the end of a bear market. While the SPX has generally outperformed historical norms in the weeks following a 1% drop in the SPX accompanied by a negative VIX, history also suggests that a safer conclusion to draw from a day like yesterday is increasing volatility around the corner.