What Happens After a Big Spike in the VIX

Amidst the recent stock market sell-off, the VIX (Volatility Index) surged to 65.73, its highest level since the COVID-19 spike which reached 85.47, and the second-highest level since the late 2008 peak of 89.53. Known as the market’s “fear gauge,” the VIX has seen 11 instances of panic spikes above 45. Historically, only the spikes in 2008 and 2020 resulted in weekly closures above this threshold, which coincided with substantial declines in the S&P 500 (SPX), as noted by strategists at Bank of America. By Friday, August 9th, the VIX closed at 20.37, down from its Monday high, indicating a certain level of stability for U.S. equities.

Strategists emphasize that the S&P 500 has historically displayed various bottoming patterns following VIX spikes. These include “V” bottoms observed in 1997, 2001, and 2020; double bottoms seen in 1998, 2011, and 2015; head and shoulders bottoms noted in 2002, 2008-2009, and 2010; along with a triangle formation in 2018.

According to the strategists, it’s premature to predict the specific pattern that may develop on the SPX following the recent panic spike in August 2024. However, similarly to the patterns in 1997 and 2018, the August 2024 spike occurred with the SPX positioned above its increasing 40-week moving average.

After an initial VIX spike above 45, the S&P 500 typically encounters challenges for four to eight weeks. Traditionally, the benchmark index shows positive results only 40% of the time during the eight weeks following such surges, with average and median returns of 0.95% and -0.72%, respectively. In contrast, the S&P 500 has risen 66% of the time with average and median returns of 1.41% and 1.95% for all eight-week periods since 1992.

These returns suggest that the U.S. equity market requires time to stabilize after a VIX spike, with potential for lackluster or weaker performance leading up to the Presidential election, which aligns with usual election year seasonality.

However, the index typically performs better over longer periods following significant VIX spikes. Thirteen weeks after such spikes, the SPX tends to rise 80% of the time, with average and median returns of 5.46% and 5.17%, respectively. One year after a spike, the SPX shows an 80% increase rate, with average and median returns of 14.07% and 18.18%, respectively.