Here’s a bullish data point (data mining?) for you among all this turmoil and bearishness. According to US Global Investors, a VIX over 40 has coincided with positive equity market returns 1 and 3 months out (via US Global Investors):
“Before Monday, the VIX closed above the 40 level five times since 1995, and in all but one occurrence the market was at higher levels just three months later. The exception is 2008, when the VIX passed 40 on its way to 90 and remained elevated for months during the worst financial crisis since the Great Depression.
You can see from the table that the market has rebounded roughly 6 percent on average over the three-month period after hitting the 40 mark. Short-term reactions are more mixed. The market has swung 11 percent in either direction during the next month of trading and the average gain is only 80 basis points.”
So the good news is, Monday’s VIX reading over 40 was bullish. The bad news is, yesterday’s 5% rally covered most of the historical 5.9% move over a 3 month period. Here’s to hoping this is more like 1998 (when the market rallied 21% after VIX 40) and not 2008 (when it fell 15% further) I guess.
Source: US Global Investors
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.