When the VIX got below 16 yesterday, I went back and looked at the behavior of VIX during the 2 previous bear markets of the last 12 years.
Here is the chart of the VIX between the index high in the S&P 500 on March 24, 2000 to the index low on Oct 10, 2002:
And here is the VIX from the market high in Oct 2007 to the low in Mar 2009:
If I am right and the market put in a major top in April of this year, then we should see the VIX behave much more in “bear market” mode rather than “bull market mode” over the coming months. In “bear market” mode, the lowest the VIX traded in both instances, over 2.5 and 1.5 year bear markets respectively, was around 16. During the majority of both bear markets, the VIX traded between 20 and 30.
Since the S&P 500 put in a high of 1422 on April 2nd of this year, the lowest the VIX has traded has been around 15.50, which happened in late April as the market rallied back above 1400, and happened yesterday and today with the market printing 2 month highs.
Sellers of volatility at these levels are essentially betting on a new high for the market. If new highs are not in our future though, then the VIX at these levels is a great buy. And that’s my view.