The chart of the VIX over the last 2 years shows 4 instances prior to this morning’s open where the index closed above the long term avg of 20 (red line) with 8 tests of the 18 level (yellow dotted):
It is important to note that for the last 2 years, a period where the VIX has averaged 14.30, every spike above the long term avg of 20 has been a massive buy signal in the SPX upon its collapse back towards 12, with the last 4 resulting in average gains for the index of about 15% from the vol collapse to the start of the next sell off:
Of course, we noted in the HD post earlier today that there are some significant differences between the current selloff and the prior moves lower over the past 2 years:
The rapid increase in options pricing has generally been an opportunity to fade the move over the past 2 years, so many traders are naturally looking at buying stocks and selling options in the past 2 days.
We are less comfortable with that strategy given the serious macro headwinds and the continued negative breadth. After yesterday’s selloff, the percentage of NYSE stocks trading above their 200 day moving average is now at a 2 year low:
This selloff doesn’t exactly look like the prior selloffs of the past 2 years in terms of internals, so our hunch is that the volatility profile might not follow the usual script either.
Having said that, it’s worth noting that this is the inflection point that all market participants are watching. We will likely know in the next 2 weeks whether the old school playbook of a zoom higher after the VIX touches 20 is in play, or whether the nature of the current selloff is different than the recent past. In the latter case, we’ll see VIX spot above 22 for the first time in more than 2 years, and likely a 10% correction in the cards for large cap equities as well.