VIX Spike, Subsequent Crash May Usher Short-Term Tailwinds

The S&P 500 Index (SPX) saw a 3% daily loss just two Mondays ago. It was the worst day for the index in about two years, with the week prior ushering two big losses as well, sending traders into a panic.

Wall Street's fear gauge, known as the Cboe Volatility Index (VIX), shot above 60 for only the third time since 1990 (as far back as we have VIX data). For those unfamiliar with the VIX, it's the implied volatility (IV) in the next 30 days for the SPX, based on option prices. Those fears calmed quickly, however, as the VIX crashed back below 20.

Bearing this in mind, let's explore how markets have historically performed after VIX spikes and subsequent crashes. 

Spikes, Returns, and S&P 500

These tables show dates when the VIX spiked above 60. The first was in October 2008, in the heart of the financial crisis. The other time was in March 2020, at the beginning of the Covid-19 pandemic. No wonder the VIX has since crashed -- we do not seem to be facing nearly as scary or significant times as we were during those previous spikes (famous last words).

Here’s another way I quantified a VIX spike. I recorded each time the VIX moved higher by at least 100% over a 10-day period, which yielded seven prior occurrences listed in the table below,

I also listed the subsequent SPX returns. The index gained 3% in the week after this recent signal, and has typically moved higher in the first week after a VIX spike. It has been positive seven times out of eight, with an average gain of 1.6%. The only time it was lower was after the most recent signal before this last one, just as the pandemic began. The market was down 20% a month later before rebounding. Overall, returns have been mixed.

Next, I have VIX returns after major spikes. It has been uncommon for the VIX to move higher, doing so only following the 2020 signal, because that was the heart of the Covid-19 crash.

Finally, I looked at how these indexes performed after the VIX crashed soon after its spike. Specifically, I considered times when the VIX rose 100%, then fell 30% within 10 days of the spike. Buying following the 30% drop in the VIX yielded the dates and SPX returns in the table below. These signals have created poor buying opportunities for stocks. The SPX typically underperformed at each of the time frames out to three months.

The VIX moves are below following the crashes. Based on this, you might expect a pop for the VIX in the immediate future, followed by a drop in the next few months. However, this is based on only six data points, which is not enough to inspire confidence in any conclusions.