The VIX and SPY are moving a lot like they did in 2011
You probably don't need me telling you that fading an overbought CBOE Volatility Index (VIX) hasn't worked out so well in the last few months. But in case you do, let me reiterate that fading overbought VIX has worked out quite poorly.
Here's ye olde updated table looking at instances where VIX closed 20% above its 10-day simple moving average, and the ensuing one-month and three-month market moves, as well as the market move until VIX closed back below its 10-day.
If it feels like a rerun of 2011, that's because so far it's very, very similar. We got overbought in VIX in late July… and then the market really got ugly. In 2011 it was in early August, this go-around it was a couple weeks later.
The good news? We re-tested unsuccessfully in 2011. The SPDR S&P 500 ETF Trust (SPY) made a lower low on Oct. 3, but then ultimately rallied off that. The timing is very similar to our current re-dipping here.
The bad news? VIX made new closing highs in October 2011, when the market hit new lows. This go-around VIX isn't getting quite as panic stricken. But hey, we do have an interesting similarity.
VIX, as we know, is quite responsive to changes in SPY, albeit in reverse. Hence the Volatility as an Asset Class Industrial Complex. Over time, VIX typically moves about negative-6x the move in SPY, though "normal" in that number does fluctuate. We typically see VIX moving more exponentially as SPY gets hit. But that's not really what we're seeing now. Here's a look at the 2015 20-day trailing best-fit VIX percentage move "line" relative to the SPY move. Remember, this is a negative relationship, so lower on the graph means VIX is reacting more to SPY.
This ratio peaked in late July, during a "minor" VIX blast, and has actually trended way down, save for a blip in the August VIX-plosion. For what it's worth, the behavior was pretty similar in 2011.
What's it mean? I'm not real sure.
I'd suggest it's a sign that markets overreact less and less as sell-offs get longer in the tooth. Normally I'd say it's time to panic at the lack of VIX Panic. But perhaps it's a sign that the worst is over? Guess we'll soon find out.
Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.