Does the recent volatility in the market mean it’s time to panic? The narrow market trading range we’ve been seeing tells a somewhat different story.
Stocks have slowed to a crawl in recent days. Since last Friday, the S&P 500 has traded in an extremely tight trading range between 3,132 and 3,145. And yet, the CBOE Volatility index (VIX) just spiked above 15 for just the second time in two months. What does the juxtaposition of a narrow market trading range with rising volatility mean? Buckle up?
Here, in chronological order, is what has happened to stocks the last three times the VIX jumped above 15 after a period of relative calm:
May 3-8: The VIX goes from 12 to 19 in just three trading sessions; the S&P 500 falls 6.8% in the next month
July 26-August 5: The VIX doubles from 12 to 24; the S&P 500 declines 6% in a week
September 19-October 2: The VIX vaults from 14 to 20; the S&P 500 falls 4% in two weeks
This time, the VIX spiked from 11.5 on November 26 to nearly 16 on December 3. It has since dipped to 13, then jumped right back up to 15. During those two weeks, stocks have barely budged—as of this writing, the S&P is trading exactly where it was (3,134) at the close on November 25.
That makes this VIX spike different from the last three times it spring-boarded above 15. As soon as those previous escalations in volatility ensued, stocks started to fall. This time, they’ve stayed put. Soon enough, the narrow market trading range will end. After all, the CBOE (Chicago Board of Options Exchange) Volatility Index is a measure of options activity, which is forward-looking. When the VIX rises, it’s typically a warning sign that stocks are about to fall.
So far, that hasn’t happened. Will it? According to our Jacob Mintz, who was a market maker on the Chicago Board of Options Exchange for nearly a decade prior to joining Cabot, 17 is usually the magic number for the VIX, not 15. When the index spikes above 17, it’s a red flag. Anything below that qualifies as normal.
Indeed, in each of those last three spikes above 15, the VIX blew past 17, too. So while the recent jump from 11 to almost 16 was just as large on a percentage basis as the late-September jump from 14 to 20, it’s not as concerning.
This time, Jacob thinks the VIX spike was a product of traders “hedging against” the December 15 deadline for a new round of U.S.-China tariffs to kick in. If no deal gets done beforehand, it could trigger another temporary backslide in stocks. But the narrow trading range stocks find themselves in now is evidence that there’s no real panic about the December 15 tariff deadline yet.
In other words: don’t start selling stocks just yet (unless you’re doing some last-minute tax-loss selling of your losing stocks, of course). There’s nothing to fear. Like with all narrow trading ranges, however, eventually a breakout will come. But as long as volatility remains under control, it could be to the upside.
Wouldn’t that be a nice present for the holidays?
Investment analyst and Chief Analyst of Cabot Wealth Daily, Chris Preston brings you all the latest from the investing world. Sign up to get updates and breaking news delivered FREE to your inbox. Get unlimited access to our library of complimentary investing reports.Sign up now!