The Wild Side of the VIX

Trying to look past the wild volatility that has gripped investors for the last few weeks, one of the more interesting developments we've seen has been the steady trend of the CBOE Market Volatility Index (VIX). The trend of the VIX has been somewhat predictable over the past several weeks, as this fear barometer has been finding support from its short term moving averages.

I've included a graph of the VIX with its 10 and 20 day moving averages. Standing out from this snapshot is the fact that the VIX has not experienced a close below its 10-day moving average since August 28. It has however fallen to intraday lows below this trendline, but it has not closed below it.

In addition, the VIX has not experienced a close below its 10 day moving average during the past 35 trading days. Since 1990, we have never seen such a trend develop in the VIX. Previously, the longest pattern occurred over 20-21 days in February 2003.

Historically, a close below its 10 day moving average has been a bullish reading. Once the VIX broke below this short term trendline, following a streak of at least 11 sessions above it, the SPX has returned around 2.6% on average over the next month, with the market being positive 76% of the time following such events.

Good Trading,

Peter Matus