VIX Says Stocks Are Going Lower

First up is a chart of the 20 largest weekly VIX spikes and subsequent returns. In general, VIX spikes are long-term bullish because panics are usually overreactions. Weeks and even months of selling are compressed in time.

   

Let's categorize these events. First, let's look at the echo panics. January 2010, June 2020 and January 2021 come less than a year after a major low. That takes out 15 percent of the table.

Now let's look at the random events. I only count one: August 2017. 20 percent off.

Next : bear market foreshock. Again only one: February 2007. This was only visible in hindsight and the market wouldn't top until 8 months later. 25 percent of the table. It's possible that November 2021 will fall in this category in hindsight. 30 percent accounted for.

Panic correction or bear market with Fed intervention: October 1997, February 2020, October 2008. 45 percent of the list.

The next category are Fed tightening periods. These are January 1994, March 1994, May 2010, December 2014, August 2015, December 2015, January 2016, January 2018, February 2018, March 2018, January 2022. Eleven events, or more than half of the list. Six of these saw stocks lose ground in the next month. More than half this list is Fed tightening events, and more than half of those sent stocks lower in the next month. If this time in another, it will be one-third of the list.

What's notable is what isn't on the list: the 2000 bear market doesn't show up at all, nor does the 2011 taper correction. VIX tripled in 2011, but didn't produce a one-week spike to make the list (the largest was about 25 percent rise).

Now look at the VIX itself. Early December, the echo from the November 2021 VIX spike, poked through resistance. The past week's spiked poked through again. The interpretation here is simple: VIX either retreats or it could make a major breakout.

The worse case for bulls is VIX drops along with stocks. That will be a strong signal that a bear market is underway. For bears, a sharp drop will be profitable, but then markets stabilize. If the old pattern repeats, this will be another 2011, 2014, 2018, and so on. The economy is trapped, the Fed does QE, inflation falls, yada yada. The Crazy Ivan scenario that changes everything would be a rise in crude oil. I imagine we could experience a market with a permanently elevated VIX of 30+ for months if crude breaks out into a major bull market, with spikes that do not make the list above because of base effects. This is the absolute worst case for stock market bulls, tech stocks and so on.