Three thoughts about S&P 500 volatility measures today:
#1: The CBOE VIX Index is supposed to indicate “Fear”, so what happens when you buy the S&P at VIX closes over 80 (i.e. a truly anomalous reading)? This has only happened 3 times back to 1990, but the last instance was just 13 trading days ago.
Here is the data:
November 20th, 2008: 80.9
S&P 500 performance the next day: +6.3%
and 1 week out: +19.2%
and 1 month out: +17.7%
and 3 months out: +2.4%
October 27, 2008: 80.1
S&P 500 the next day: +10.8%
and 1 week out: +13.8%
and 1 month out: +0.3%
and 3 months out: -0.4%
March 16th, 2020: 82.7 (an all-time record close)
S&P the next day: +6.0%
and 1 week out: -6.2%
and through today (2 weeks and a day later): +3.5%
Takeaway: unlike the 2 prior instances where the VIX closed above 80 (both within our 2008 Playbook framework), the US equity market is not really rewarding those traders who bought “peak fear”. Specifically:
- March 17th’s snapback rally was pretty puny (+6.0%) in comparison to the 2 comps in 2008 (average +8.6%).
- If you waited a week to sell what you bought on the March 16th close, you saw a negative 6.2% return rather than the +16.5% average gain of 2008.
- Why is this happening? Our working theory is that markets are running a hurry-up version of the 2008 Playbook because they know the history we’re citing here. This is one reason we’re reluctant to lean too hard on the 2008 Playbook for the exact timing of any next leg down.
#2: Comparing the VIX today at 57 to the depths of 2008-2009 Financial Crisis:
- The average VIX close during Q4 2008 was 58.6
- The standard deviation over that timeframe was 10.1.
- That makes the 80 level noted above statistically significant (2 sigmas from the mean is 79).
- Also worth noting: when the S&P 500 finally bottomed on March 9th 2009, the VIX was at 49.7.
Takeaway(s): First, today’s VIX close is spot-on the average of Q4 2008, which is another reminder that, like Tolstoy’s saying about happy families, every crisis is the same. Second, whenever anyone tells you that stocks bottom in unusually volatile markets just point them to March 2009.
#3: Lastly, we wanted to touch on the CBOE SKEW Index, which measures the relative price of puts and calls on the S&P 500 to see how worried options traders are about a near term decline in stock prices. When they are, they pay up for puts relative to calls and SKEW rises. There is a chart of SKEW over the last 15 months above, but here are a few observations:
- SKEW actually peaked last December at 150 on 12/19, presumably because asset owners wanted to lock in large US equity gains going into year end.
- Only in the last 2 weeks has SKEW started to rise, from 113 to 125.
- This is not unusual when overall volatility picks up dramatically. Exactly the same thing happened in October 2008, and from similar levels (112 on 10/1, 124 on 10/30).
Takeaway: as we have mentioned in past discussions, SKEW is an interesting measure if options markets appeal to your inner finance geek (our excuse for talking about it), but it is in no way a predictor of near-term returns or volatility.