If you’re like me, you’ve probably been catching some Olympic events on TV lately. Volleyball is one of my favorites. There’s something really exciting about watching players leap into the air and powerfully spike the ball over the net.
This week, a different kind of thrilling spike hit the financial markets. It happened in the VIX Index, also known as the “Fear Index,” a common measure of stock market volatility.
As shown on our indicator above, the VIX spiked more than 7 standard deviations above its 193-day average (gold line, bottom clip). This sudden surge in market volatility was second only to the “Volmageddon” VIX spike that occurred in 2018.
What caused this jump? Well, concerns over a slowing economy in the U.S. was one culprit. An unwinding in the so-called Japanese Yen carry trade was another—more technical—explanation. But the simpler answer is that after a long period of unusually low volatility, the market was due for a big spike.
However, the good news is that, according to the indicator, the S&P 500 Index tends to do rather well after the VIX spikes more than 1.1 standard deviations above its average. At 7.16 standard deviations, we’re well above that threshold now. Past data shows that some of the best stock market returns have come after the VIX has spiked and started moving lower.
That said, we’re not suggesting that all market turbulence is over. High VIX readings generally mean we can expect more volatility in the near term. However, if the VIX starts trending lower from here, it could signal that we’re approaching a short-term bottom in this recent sell-off.
This is intended for informational purposes only and should not be used as the primary basis for an investment decision. Consult an advisor for your personal situation.
Indices mentioned are unmanaged, do not incur fees, and cannot be invested into directly.
Past performance does not guarantee future results.
The S&P 500 Index, or Standard & Poor’s 500 Index, is a market-capitalization-weighted index of 500 leading publicly traded companies in the U.S.