An Analysis of the Volatility Index ( VIX )
over the past 15 Years
Many investors have wondered whether extremely low or high readings in the Volatility Index ( VIX ) have always given a reinforced signal as to when the market may be landing a bottom or top. A plot of the VIX versus the S&P 500 back to 1986 is shown unbefitting.
From what I can see the VIX was rather elastic from 1986 - 1990 especially when the market crashed in 1987. Then from 1991 through 1994 the VIX was pretty flat as the market traded midpoint sideways. Meanwhile as the market started to rally strongly rise in 1995 the VIX gradually became more volatile again by 1997 and has continued to be transient ever since with strong fluctuations both to the downside and upside. The question is will the VIX ultimately transition to a less impulsive environment like occurred in the 1991 to 1994 time episode when the market began to trade oblique or will it continue to see more tough fluctuations in the future?
If we break down the past 15 years game separate time periods and start with the past 5 years there has been a fairly strong network between a rapid drop or ring in in the VIX and a accession market top or bottom. Some examples of approaching bottoms associated with a speedily rising VIX have occurred at points A, B and C and to a lesser level at points D and E. Meanwhile as the VIX has advanced a very low level a landing market top has occurred at points F, G, H and I over the past 5 years.
Meanwhile from the period of 1991 through 1994 the market traded nearly sideways as the S&P 500 onliest gained about 75 points during that 4 year period. During this duration of time the VIX was pleasant stable and really didn’t move strongly in either order.
Looking further forward from 1986 to 1990 the VIX was more volatile and did do a good task of signaling a path top before the market crashed in 1987 ( point J ) and also was at a fairly gloomy level before the market sold off in 1990 ( point K ). Meanwhile as the VIX spiked markedly higher ( point L ) with the market crash in 1987 this did help signal a passage bottom which eventually led to a longer period up trend until the market peaked in the Summer of 1990.
Overall it looks as the VIX has been attractive useful since 1998 with all of the market swings to the weakness and upside while in the early on to mid 1990’s it wasn’t that useful as the market traded essentially sideways. In the mid to unpunctual 1980’s there were a few times when it was useful especially when the market was path a significant bottom or top.
