Why the VIX Index Is a Bullish Sign for Stocks

(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)

Stocks have been on a wild ride since the start of 2018. But in the most recent downdraft, the main index for measuring fear has been acting relatively calm. Despite a series of plunges in the S&P 500, the CBOE Volatility Index, better known as the VIX, has not seen the expected spike indicating that investors are looking to hedge their portfolios by buying put options. That relative lack of fear could be sending a signal that calmer and more bullish days lie ahead for the stock market. 

According to data from Ycharts, since 2010 the VIX has averaged a level of 16.4, with a standard deviation of 5.57, putting the index in the range of 10.86 to 22, making VIX's current reading today of roughly at roughly 22.15, puts just outside the normal historical range.

VIX Index

The near-normal levels in the VIX suggests investors aren't rushing out to buy protections to their hedge portfolios—a sign that investors may not be expecting further declines. The latest stock market downturn from March 19 through April 3, 2018 has seen the VIX reach a closing high of only 24.9. During the steep sell-off from Jan. 4 through Jan. 20, 2016, the VIX reached a closing high of 27.6, while the period of Aug. 18 to Sept. 2 in 2015 reached a closing high of nearly 41. 

(Data compiled using Ycharts)

VIX Futures Contracts

The term structure of the VIX index is also indicating the recent volatility may soon be calming. The Spot VIX index is currently trading at a higher level than VIX futures contracts for July 2018, meaning investors are looking for volatility to fall in the coming months. Before the recent stock market volatility, the spot VIX traded well below the future contracts.

^VIX Chart

^VIX data by YCharts

Put-To-Call Ratio

The Put-to-Call ratio for the S&P 500 has averaged 1.74 since 2010, with a standard deviation of 0.38 putting the normal range for the put to call ratio of 1.37 to 2.2. It places the April 3's level of 1.44 on the lower end of normal. In fact, the ratio peaked at only at 2.53 during the sell-off of the past two weeks. That same ratio rose to 3.77, nearly 50% higher, on Aug. 24, 2015, during that two-week period of turmoil. It is a sign that fears today are not nearly as high as other periods of significant stock market volatility and that investors aren't aggressively buying puts.

No Flight to Safety

Even the bond market has expressed a sense of calm during the recent stock market volatility, with the 10-year U.S. Treasury yield falling from 2.85% to 2.78%, hardly a move lower. Compare that to the decline from Jan. 4 to Jan. 20, 2016, where the rate fell from 2.25% to a low of 1.98%.

It would seem, given the previous periods of stock market turmoil and levels of extreme price movements, fear gauges have surged to higher extremes. It suggests the latest bout of volatility is not creating the same levels of fear. Perhaps it is a sign that the recent downdraft in the stock market is close to or at the bottom. 

Michael Kramer is the founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdingsInformation presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance. 

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