Schaeffer's Top Stock Picks for '25

Fear, Complacency, and 'Irrational Exuberance'

Viewing the CBOE Volatility Index (VIX) through a 'mean' lens

Jun 3, 2015 at 9:15 AM
facebook X logo linkedin


It seems like a lifetime ago now, but back at the end of 2014, there was a bit of a CBOE Volatility Index (VIX) rush. It closed at 19.20, virtually guaranteeing that year-to-date performance would look misleadingly bad in 2015.

And, sure enough, here we are five months into 2015. The SPDR S&P 500 ETF Trust (SPY) is up in the 2%-3% range and basically churning and churning. That should translate to VIX losing about 10%-15% of its value -- yet, using the last day of May as the endpoint, VIX has dropped 28%! Complacency, I say! 

Well, I'm kidding. As we note periodically, it highlights the problems of arbitrary endpoints more than anything else. I'm fairly certain I can prove anything statistically if I can carefully choose both endpoints. 

Mean VIX gives a better indication. And as Russell Rhoads notes, that's actually telling a very different story this year:
 

"As of the end of May the average for VIX this year was 15.30, while in 2014 the average at this point was 14.22. There are more volatility indexes that consistently measure implied volatility as indicated by S&P 500 index option pricing and all have been higher in 2015. VXST (9-day volatility) averaged 13.68 for the first five months last year and averaged 14.28 this year. Farther out on the curve the differences are even more dramatic with VXV (3-month volatility) averaging 17.30 this year versus 15.45 through five months last year and VXMT (6-month volatility) averaging 18.91 versus 16.80 in 2014."

When viewed through a "mean" lens, volatility has actually lifted in 2015 vs. the levels we saw at this point in 2014. What's more, the longer the volatility measure, the larger the lift. Fear, I say!

Well, we're not exactly in a major fear cycle yet. Perhaps we're transitioning, at least so far as the longer-term view is concerned. Here's the mean VIX every year going back to 1993: 

 

150603Warner

 

Now, I couldn't figure out how to auto-label the horizontal axis, so let me explain. Each bar represents one calendar year. So the furthest left is 1993, the next is 1994, and so on -- ending at 2015 all the way on the right. 

As you can see, mean VIX ebbs and flows over time. The pops toward the left were during the tech bubble and bust, the pops toward the right were centered around the financial crisis of 2008.

The troughs tend to last 3-4 years, and we're pretty clearly in Year 4 of the current trough. It's highly likely we close 2015 with a higher mean than in 2014, and we close higher in 2016 than 2015. Volatility is pretty cyclical. 

But even if that comes to pass, it's unclear whether that means the market itself will crack. Perhaps we simply get more volatile on the upside. That's what happened in the late-90s volatility, and stocks lifted side-by-side for more than three years before the bubble finally burst.

If you're old enough to remember 1996, you might recall the term irrational exuberance. Then-Fed Chairman Alan Greenspan uttered it at the end of 1996. Stocks were pretty clearly on the high end of normal at the time. If you sold then, you got out ahead of the volatility lift, but you also missed huge market gains over the next few years.

Not saying we're headed to a similar stretch. I'm just saying that while I do expect volatility to climb, I don't necessarily think that has to coincide with declining stock prices. 

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.

 
 

Which of These SUB-$5 Stocks Could 26x From Here? (AD)

He called a rare 11x on Tesla…

Then he called a 26x on Workhorse…

Then an even rarer 35x on Nio Inc…

Now Tim Bohen says these 5 tiny “America First” stocks are next up in 2025.

They’re trading for less than $5 right now.

But thanks to Elon & Trump’s new alliance…

They could be off to the races in Trump’s first 100 days.

And right now for a limited time…

You can get the names & tickers for just $1 here. (AD)

10 Stock Picks FREE
 
 

Featured Articles from Trusted Partners:

🚀 One Stock Pick Could Change Everything in 2025
What if one stock pick could define your success next year? Get 10 expert-vetted stocks set for 2025—plus 5 bonus picks to watch now. Get the Report →

🆕 New Options Need New Trading Strategies
Zero-DTE options are the newest (and hottest) options to trade.  Professional traders have rushed into the market and are making a mint.  Don’t get left behind - learn all about these options, how to trade them, market setups to profit from, plus much more. Download now →

👀 Revealed: 3 Defensive Stocks for Your Portfolio
Worried about the market? This free report reveals 3 under-the-radar defensive stocks for uncertain times in any kind of economy.

 

 
 

FREE Report Download

 

Follow us on X, Follow us on Twitter