Past Panic Is No Guarantee of Future Hysteria as VIX Jumps 32%

The financial press likes to refer to the VIX (VIX) as the market’s “fear gauge.”

That’s probably because it fits headline spaces a lot better than “an index that reflects a market estimate of future volatility based on the weighted average of the implied volatilities for a wide range of strikes, with first and second month expirations used until eight days from expiration, at which point the second and third month contracts are used.”

Yesterday the VIX, or the Chicago Board Options Exchange Volatility Index if you prefer formal titles, surged 32 percent in the sixth-biggest jump of the bull market since 2009.

There are, of course, much more important numbers to talk about after a day like yesterday. Like this one: 298. That’s the number of people who perished when their plane was shot down en route from Amsterdam to Kuala Lumpur. Or this one: 262. That’s an estimate of the number of Palestinians and two Israeli soldiers killed since fighting worsened last week.

Fear about the future is an intangible that’s hard to quantify. Yet the VIX is maybe the best we have, whether you’re worried about important things like world peace or, by comparison, more trivial things like your investments. When discussing the VIX, the CBOE, like so many other purveyors of financial products, insists that “past performance does not necessarily indicate future results.”

Past Performance

Yet most who work on Wall Street also suspect that ignoring past performance does not necessarily guarantee future employment, so let’s take a look at some of the past spikes in the VIX and what they foretold for the fate of the market, if not the fate of world peace.

Aug. 8, 2011. The VIX jumped 50 percent to 48. This was the biggest move by the VIX in the current bull market, both by point and percentage terms. It came amid a five-month puke in the S&P 500 as gridlock in Washington led S&P to strip the U.S. government of its top credit rating. By the time the VIX finished this spike, however, the selling was almost over. The S&P 500 only fell another 1.8 percent.

A smaller, 35 percent spike the week before proved a better horoscope: stocks had another 8.4 percent to fall. Another 35 percent leap on Aug. 18, 2011, prefaced a decline of as much as 3.6 percent in the S&P 500. In any event, that sweaty August panic proved short lived and the market recovered in the fall before finishing 2011 little changed.

VIX Surges

In the current bull run, the only other VIX surges bigger than yesterday’s were last year. The index jumped 43 percent on April 15, 2013, as the Boston Marathon bombing exacerbated fear in a market already spooked by a slowdown in China’s economic growth. Yet there turned out to be little reason to worry about stocks. The S&P 500 fell less than 0.7 percent in the following days before the bull run commenced apace. And the S&P 500 never traded lower following a 34 percent VIX jump on Feb. 25 of last year amid concern over an Italian election.

So yes, big moves in the VIX do a lot to quantify the level of fear in the market. Just maybe not a lot to predict the future moves of the market.

“We probably should get out of the habit of using the VIX as the sole measure of volatility,” Liz Ann Sonders, chief investment strategist at San Francisco-based Charles Schwab Corp., said in an interview with Bloomberg Radio today. “I’m not sure it tells you much about either the prospects for volatility looking forward or the prospects for the return in the market.”

To contact the reporter on this story: Michael P. Regan in New York at mregan12@bloomberg.net

To contact the editors responsible for this story: Lynn Thomasson at lthomasson@bloomberg.net Jeff Sutherland

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