SPX 1, 2 and 3-Year Returns Following Top and Bottom Five (and Ten) VIX Average Annual Readings
On Saturday, I posted Putting
Low Stock Volatility to Good Use (Guest Columnist at Barron’s) and used
that opportunity to expand upon some of the points I raised in my February 18th column
for Barron’s. Specifically, I addressed the issue of the clustering
of low volatility and used a graphic to show that when the VIX closes
below 12, it tends to persist in these low readings, clustering for several
years, before remaining above 12 for even longer periods during high volatility
regimes.
Another claim I made in the Barron’s article (Putting Low Stock Volatility to Good Use) that I thought might benefit from a little graphical support was my contention:
“VIX data suggests the low volatility
provides a foundation for extended bullish moves in stock. Look at the five
highest and lowest average annual VIX readings and calculate the performance of
the Standard & Poor’s 500 index one, two, and three years after the VIX
extremes. After one year, the S&P performance following the low VIX is
about 20% higher than after the high VIX. For two years, the difference jumps
to 40% and by the third year the cumulative performance differential is
approximately 90%. Wariness aside, low volatility begets low volatility and is
generally bullish for stocks.”
Now there are
two ways to compare percentages and the best way for me to illustrate this is
with an example. If we are comparing 5%
with 4% is the 5% value 25% higher than 4% or is it 1% higher? You can make a case for either comparison,
one of which is made with division and is more of a pure percentage calculation, while the other which is made by
subtraction and is perhaps best thought of in terms of percentage points. In the Barron’s article, I
used the division/percentage method, which is the norm when comparing numbers that are not
percentages in and of themselves. This time around I will try
to minimize confusion and use the subtraction/percentage points approach instead.
In the first of
the two graphics below I have calculated the SPX 1-year, 2-year and 3-year
returns following the years with the five highest average VIX values (2008,
2009, 2002, 2001 and 1998) with a dashed black line as well as the years with
the five lowest average VIX values (1994, 1993, 2006, 2005 and 1994) with a
solid double blue line. In all three time
frames, the better returns followed the lower VIX readings and I used a green
area series to show the (percentage point) difference.
[source(s): CBOE, Yahoo, VIX and More]
For comparison
purposes, in the second graphic below I have plotted the same SPX 1-year,
2-year and 3-year returns following the years with the ten highest average VIX
values as well as the years with the ten lowest average VIX values. Once again, in all three time frames, the
better returns followed the lower VIX readings, though in this instance the
performance gap between the lower VIX readings and higher VIX readings is
somewhat reduced.
[source(s): CBOE, Yahoo, VIX and More]
I offer up these
graphics because I maintain that there are many skeptics regarding not only the
persistent clustering of low VIX readings, but also related to the lack of
robust data showing the effect of mean
reversion during low volatility regimes.
As I have noted previously, mean reversion is much more predictable and
tradeable following a VIX spike than after a significant decline in the VIX.
Follow me on Twitter at: @VIXandMore
Related posts:
- Putting Low Stock Volatility to Good Use (Guest Columnist at Barron’s)
- My Low Volatility Prediction for 2016: Both Idiocy and Genius
- Was the VIX Too Low in 2013? No…
- A VIX of 15!?! Meet the New Reality
- S&P 500 Index 20-Day Historical Volatility Hits 39-Year Low
- Anchoring and a VIX of 20
- How Low Can the VIX Go?
- Where Will the VIX Bottom?
- VIX High or Low? It Depends…
- VIX Median Reversion and Five-Year Moving Averages
- A VIX Risk Reversal
- Why VIX Puts Get Cheaper in More Distant Months
Disclosure(s): the CBOE is an advertiser on VIX and More
