On Friday, May 6, the S&P 500 (SPX) closed down about -0.57%, while the CBOE S&P 500 Volatility Index (VIX) finished the day down -3.24%. The VIX is a popular measure of the S&P 500’s expectation of near-term future volatility based on the S&P 500 index options. Volatility, or how fast prices change, is often seen as a gauge of market sentiment, particularly the degree of fear among market participants. The VIX is also known as the “fear index.” On most days, the S&P and the VIX are inversely correlated, i.e., if the S&P is moving up, the VIX is moving down and vice versa; over the last 10-years, SPX and the VIX have a correlation of about -0.80 based on daily returns (a high degree of negative correlation). So, it’s a bit surprising to see the VIX had a relatively large down day on a day when the S&P also finished down.
And, as it turns out, this is a pretty rare occurrence. Since 2000, there have been only 29 days when the S&P 500 was down -0.50% or more and the VIX was down -3% or more. Several occurred at or near market bottoms (as measured by the S&P 500). For example, we saw a cluster of such days near the bottom of the “COVID Crash” in March 2020. The previous occurrence was in early February 2018, just a couple of days away from the bottom during the so-called “Volmageddon.” Another such day occurred in early March 2009, just a few days before the S&P hit its low during the Global Financial Crisis.
Of course, this is no guarantee that we are currently at or near a market bottom. There were three days in 2008, one in January and two in December, when the S&P was down more than -0.5% and VIX was down more than 3%, and of course, the market ultimately continued lower.
Overall, however, the average forward returns from these days are encouraging, especially if we were to exclude those that occurred during the dot.com crash of the early 2000s. The average one-year forward return of all occurrences since 2000 is +16.39%; if we look at only the occurrences since 2002, the average return is +30.60%. The table below shows all occurrences since 2000 and the forward total returns (inclusive of dividends) for the S&P 500.
On Monday, May 9, both the SPX and the VIX were inversely correlated as we would expect. The S&P 500 lost 3.20% on very heavy volume. A 90% Downside Day was registered with Down Volume at 94%. Breadth was similarly negative, with decliners at 88% of Adv/Dec Issues, suggesting that few areas of the market were positive. 90% down days are typically found near market bottoms. The above data points and the NYSE High Low Index suggest that the markets are in a bottoming process.
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