Stock Returns in U.S. Are Poised to Lag After Plunge in VIX, Bespoke Says

The VIX dropping by almost half in the past month is a bearish sign for Standard & Poor’s 500 Index returns, according to Bespoke Investment Group LLC.

The VIX, as the Chicago Board Options Exchange Volatility Index is known, has tumbled 41 percent since May 20. In the dozen times since 1986 that it slumped 35 percent or more in 20 trading days, the S&P 500 lost 0.72 percent and 1.35 percent on average during the next week and month, respectively, and rose 0.84 percent and 3.78 percent in three and six months, Bespoke said. All four returns trailed the average performance for all days, according to the firm.

The last time the VIX fell this fast was after the crash known as Black Monday in October 1987, according to a report sent to clients yesterday from Harrison, New York-based Bespoke, founded by Paul Hickey and Justin Walters. Since 1986, gains for the S&P 500 during all one-week, one-month, three-month and six- month periods have averaged 0.16 percent, 0.61 percent, 1.89 percent and 4.01 percent, respectively, Bespoke said.

The VIX, which measures the cost of using options as insurance against declines in the S&P 500, surged to 45.79 on May 20 amid concern that some European nations will struggle to repay their debts. It rose to 27.05 today after sinking to 22.87 yesterday, the weakest intraday level since May 4. The gauge has averaged 20.35 during its 20 years of history.

‘Old VIX’

Because VIX data don’t go back past 1990, Bespoke used its precursor, the CBOE S&P 100 Volatility Index, for the data points in the 1980s. The “old VIX,” which reflects prices paid for S&P 100 options, closed at a record 150.19 on Oct. 19, 1987, following the stock market crash known as Black Monday.

Birinyi Associates Inc., where Hickey and Walters worked as analysts before leaving to found Bespoke in 2007, said in March that investors looking for clues about the U.S. stock market should probably ignore the VIX.

Speculation that equity returns will be positive after the volatility gauge decreases and negative when it climbs has little basis in fact, according to Laszlo Birinyi’s Westport, Connecticut-based firm. The VIX provides a summary of historical price swings and tends to move in lockstep with equities instead of forecasting their direction, Birinyi Associates said.

To contact the reporters on this story: Jeff Kearns in New York at jkearns3@bloomberg.net; Scott Schnipper at sschnipper@bloomberg.net.

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