Wednesday, April 26, 2006

Low VIX: What It Means for the Next Day(s)

A couple of VIX observations for today's market:

We were down about -.40% on SPY during Tuesday's session. Since March, 2003 (N = 791), when we've been down between -.20% and -.40% in a single session with a VIX below 12 (N = 14), the next day's change in SPY has averaged -.10% (7 up, 7 down). That's weaker than the average one-day change of .06% (441 up, 350 down) for the sample overall. Indeed, when SPY has been down between -.20% and -.40% in a session (N = 105), the next day's returns have been slightly bearish.

In general, when VIX has been below 12 (N = 129), SPY has averaged a loss of -.12% (60 up, 69 down) over the next three days. That is much weaker than the average three-day gain of .18% (462 up, 329 down) for the sample overall. Similar results are found when we isolate VIX readings between 11 and 12.

It appears that a low VIX has been bringing subnormal near term returns. Worth keeping in mind the rest of this week.