A Rare Move for $VIX

By Lawrence G. McMillan

...Volatility indices exploded to the upside for a second straight day yesterday. $VXST has gone from just below 11 to nearly 23 in three days (it rose 10 points in the last two days). $VIX itself went from 14.08 to 20.97 in three days.  First and foremost, that puts $VIX in a “spiking” mode.  Once in a spiking mode, we continue to track the intraday high price of $VIX.  Currently, that is 21.01 – yesterday’s high.  But it appears that $VIX will open higher this morning, as it is indicated another full point higher, even though $SPX futures are only down 7 points.  $VIX will generate a broad market buy signal when it closes at least three points below that highest intraday price.  So, it is possible that a buy signal could be generated as early as today.

What’s more worrisome is that $VIX has broken out of the 13-17 trading range, and has established an uptrend.  That is bearish for stocks.  Many analysts are scrambling through past data to see what has happened previously when $VIX made such a huge upward move from a low base.  Even more amazing is that $VIX is making these moves without much of a decline at all by $SPX.   That is quite rare.  

We are going to run some studies today to see if we can find any useful previous data that demonstrates what happens next, but frankly this is such a rare occurrence, that there aren’t going to be that many data points to work with.  In the past three days, $VIX has risen a whopping 49%, while $SPX has fallen 1.9%.  That is a huge differential.  Some statistics that I have seen this morning show that the past 20 times that $VIX has risen by more than 40% in three days, $SPX was down 5.3% on average.  So this is a very extreme case.

The move in $VIX and related products was so violent that the term structure has flattened out in the front end, to a large degree.  The first four futures months are essentially trading at the same price, and $VXST is now above $VIX.  What would be more interesting, though, would be for $VIX to close above $VXV.  That would indicate an oversold extreme and it is another trading system that we could rely upon...

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