On January 15 the CBOE Volatility Index (VIX) met a trendline for the fourth time in the past 2h months. A solid close beyond the trendline would signal that the VIX is ready to move higher…and stocks move lower. That “solid close” occurred on January 27.
Last week’s spike in the VIX was the largest in two years.
This chart shows the continued potential for a volatility spike and concurrent stock market decline. The top graph is the daily range of the S&P 500. The bottom graph is the VVIX/VIX ratio.
The CBOE Volatility Index (VIX) measures the market’s estimation of what S&P volatility might be over the following 30 days.
The CBOE VVIX index measures the market’s belief of expected volatility for the VIX over the following 30 days. In essence, the VVIX measures how rapidly S&P 500 volatility changes.
Now observe the trendlines attending the movements in the VVIX/VIX ratio. From late December 2018 to February 2020, the ratio’s rise was contained by a rising trendline, which was met three separate times during short term stock market declines. When the ratio broke below the rising trendline in February 2020, it signaled an impending jump in market volatility. The February stock market high led to the fastest decline from an all-time high in history, with the DJIA declining 38% over a span of just 27 days. The VVIX/VIX ratio plunged to 2.05 on March 12, 2020 and has been advancing since then, adhering to a rising trendline just like in 2018-2020.
On January 27, the ratio broke below the ten-month trendline, suggesting that volatility is ready to spike higher, faster.