Quite the volatile week in … volatility. Seems like only last Wednesday that VIX soared over 30 … wait, it was only last Wednesday.
Yes, twas the Ides of March. Plus a day. Options trading investors watched closely as the CBOE Volatility Index (CBOE: VIX) rocketed up and closed at 29.4, a healthy 35% above its 10-Day Simple Moving Average. The VIX gets quite overbought when it closes 20% over its 10-Day SMA. Since the tech bubble burst, the VIX averages about three “Over 20%” events per year. I would note that to avoid clustering, once VIX crosses the 20% threshold, I count it as one event until VIX closes back under the 10-Day SMA again.
So its uncommon, but hardly unprecedented. What makes this “event” stand out though is how quickly it resolved. Yesterday, a mere three trading sessions after VIX exploded, it imploded. It closed at 20.61, a cascade of 30% off Wednesday’s close. And perhaps more stunningly, almost 10% below the 10-Day SMA a mere three days after closing 35% above.
VIX has had worse three day stretches before. But I can’t find one where one of those drubbings basically took it from overbought to oversold so fast.
Perhaps most interestingly, it didn’t take an enormous move in S&P 500 Index Options (CBOE: SPX) to get the VIX Pop and Drop. We only dipped 2.9%, then simply reversed it over the next three sessions. We can view this all sorts of ways. Hindsight says we got WAY to panic-stricken last Wednesday. On the other hand, even unwarranted Fear tends to have more life than this. Keep in mind that volatility prices in the market expectation for future volatility. You can divide VIX by 16 and it gives you a close approximation of the markets “guess” for the the range it expects to see on 68% of all sessions. That is, VIX at 21 suggests the market expects on about two-thirds of days to see SPX move within about a 1.3% range (21/16). So while 2.9% exceeds that by a bit, the VIX move that day did go a bit far.
We have to ask of course whether such a pattern of VIX action gives any market signal. And I really couldn’t find much. That’s because this tends to happen on big rallies off very high VIX levels. Or conversely, relatively small drops off low VIX levels. We had kind of a middling size drop within a very average VIX regime. I would guess that this signals a longer term trend change in VIX, i.e. a reversal of the two-year downtrend, but only time will tell.
Follow Adam Warner on Twitter @agwarner.