The VIX and Market Returns

Most commentators assume that low volatility is good for the market. That’s not necessarily the case. All a high low or VIX is at predicting is high or low volatility, not direction.
CNBC reports:

Historically, the S&P has seen an average of 3% and 6% gains respectively over the 3 and 6 months that follow a crossover below 30.

That’s a completely useless stat. The general market averages close to those returns anyway. Given the historical sample size, that study simply measures noise and nothing else.
Here are some numbers I came up with:
Since 1990, when the VIX is below 15 (about 31% of the time), the S&P’s annualized return is 7.8%.
When the VIX is between 15 and 20 (27% of the time), the S&P’s annualized return is 2.8%.
When the VIX is between 20 and 25 (22% of the time), the S&P’s annualized return is -1.5%.
When the VIX is over 25 (20% of the time), the S&P’s annualized return is 11.1%.
To the extent there’s a tipping point, it seems to be a VIX of 13. Above 13, the S&P shows an annualized return of 3.0%, below 13 it jumps to 14.1%. However, 13 is a very low VIX reading; it’s been below 13 about 18% of the time.
Outside that, there doesn’t seem to be much of a trend.

Posted by on May 19th, 2009 at 4:17 pm


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