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Another VIX History Lesson

Based on previous signals from the widely-followed volatility index, prices should still move higher over the next couple of weeks

By Paul Cherney

Some profit-taking on Tuesday would likely and natural but it would not diminish expectations for additional gains.

On Wednesday, July 24, the VIX (a market volatility index) gapped higher at the open, printed a high of 56.74 and then finished the day below 50. The signal dates below represent trade days when the VIX had an intraday high above 50 and then closed below 50 (since 1988). The table below chronicles the 22 trade days following previous similar VIX moves in the past.

Legend:

Column 1: Date, the signal date would be the date that the VIX closed under 50 after having printed over 50 intraday. (Data 1988 to present, S&P 500)

Column 2: Best Close, the best closing gain (percentage basis) in the 22 trade days after the signal date.

Column 3: Best On, the number of trade days after the signal date that the best closing gain occurred.

Column 4: Worst Close, the worst closing loss (percentage basis) in the 22 trade days after the signal date.

Column 5: Worst On, the number of trade days after the signal date that the worst closing loss occurred.

Date Best Close Best On Worst Close Worst On
10/16/1989 1.26% 4 -2.99% 15
12/28/1997 4.54 18 -1.91 2
8/31/1998 11.37 16 1.74 4
9/1/1998 7.22 15 -2.05 3
9/11/1998 5.65 8 -4.92 19
10/5/1998 13.16 22 -2.95 3
10/7/1998 17.55 22 -1.16 1
10/8/1998 18.92 21 2.60 1
10/9/1998 15.91 20 1.06 2
9/21/2001 13.64 17 3.90 1

If you look down the last column, entitled "Worst On" you can see that in the first 22 trade days after such an event, 8 out of 10 of the worst closing losses occurred by day 4.

If you look at the column entitled "Worst On," this is a list of the lowest closes as measured by the % change relative to the close on the signal date (which for this market would equate to Wednesday's S&P 500 close of 843.42). Four out of these 10 signal dates did not even experience a close lower than on the day of the signal (because the lowest close represented a positive return relative to the signal date.

The average of all the "Best % Gains" is +10.9%, if we averaged the number of trade days later "Best On" column that these "best 22 day closes" occurred, it is trade day 16 after the signal date.

If both of these averages unfolded in this market, that mean that the S&P 500 would close at 935 on August 15, 2001.

History never repeats itself exactly, but I think this table offers credible historic precedence that prices should still move higher over the next couple of weeks.

Not every day can be winner but I expect higher prices.

The Nasdaq is in resistance at 1315-1350, with a focus 1326-1339. The next layer of resistance looks very thick 1365-1402. Immediate Nasdaq support is 1307-1290, then 1264-1251.

The S&P 500 finished Monday's session inside resistance which is 876-934 with a focus 895-909. This focus is so well defined (from trade days 7/15 through 7/18) that I do not think it is likely that this first assault can break out higher. There will probably have to be some consolidation and some short-term profit taking. If I'm wrong, the next resistance is 944-959.

The S&P 50 has immediate support 887-878 (small ledge) and then considerable support in the 853-835 area.

Cherney is chief market analyst for Standard & Poor's

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