The history is a very good guide to the future. Unfortunately it does not replay or repeat itself the same way again and again. This time the equity market is choppy and very volatile. Investors are just thinking about the next catastrophe coming down the way and it obviously have to be Europe. The European financial crises and obviously not the Euro crises is something which occupies the investor mind taking his eyes off many other important issues. Let us concentrate for a moment on the better performing equity markets in the world. US equity markets are showing again a positive return for the years and since the European financial crises broke out in early 2010 the US equity market appreciated by more than 10%. This is not too bad for the current environment and uncertainty.
Now the VIX as an indicator of fear refuses to rise. Does it mean the fear is less or is the market not driven by fear any longer? Between the levels of 20 and 40 the VIX heralded a choppy market which could be either rising, like in the late 90s or falling, like 2001-2003. Any major push beyond 40 was a fear factor which marked an important low in the markets ascent or descent. Following the exhaustion the US equity market generally quieted down falling towards 20 reading. Usually it did not revers in the middle of this range but rather moved toward the lower level around the 20 or even 15 reading. Thus the choppy current markets may last for a while but the short to medium trend could take them higher against most market participants expectations.
The VIX implications are also supporting the December and early January characteristics of the equity markets which tended to be a reliable source of alpha over many years.
Source: Bloomberg
Usually the SPX and VIX move in opposite directions, especially on a big down day. On days when the S&P lost more than -1.5%, the VIX rose 95% of the time – Whatever the reason, the table on the attached website shows how the futures performed going forward when both the S&P and the VIX declined by a large amount on the same day.
