The VIX has been
down six days in a row and is currently up a few pennies.
Assuming the VIX closes down again today (a fascinating thought in an of itself
given the increasing Fed hawkishness as well as concerns about a Russian escalation
in Ukraine),
what might the string of declines portend for stocks going forward? I pose this question because I think the
historical data is telling, with 30 such instances of 7-day declines in the 33
years of VIX data going back to 1990.
What typically happens to stocks when the VIX falls seven days in a row? Not surprisingly, if the VIX is continuing to
fall, then stocks are almost always continuing to rise, to the point they becomes
overbought. Going forward, stocks have a
tendency to see a one-day decline and some slight underperformance during the
course of the next few days and up to a week.
At some point, whatever had been the fundamental driver of the decline
in the VIX begins to regain control of the price movements in stocks and stocks
move up sharply, with a high likelihood of outperforming the long-term average
moves in stocks.
In the graphic
below, I show the movements in the S&P 500 Index following a 7-day decline
in the VIX relative to the average moves in the SPX during the same
period. You can see that the relative underperformance
lasts five days, at which point the overperformance kicks in, with the maxim
outperformance coming after 100 trading days.
[source(s): Yahoo, TD Ameritrade, VIX and More]
Further
Reading:
Top
VIX Crushes in History
VIX
Narrowly Misses New Consecutive Day Decline Record
VIX
Sets New Record with Nine Up Days in a Row
Streaking
While it has not been updated in a while, new readers may also enjoy older posts that have been tagged with the Hall of Fame label.
For those who may be interested, you can always follow me on Twitter at @VIXandMore
Disclosure(s): none