VIX Risk Indicator Returns To Neutral Level After Recent Stock Market Correction
TMC Research’s VIX Risk Indicator has returned to a neutral reading after the latest drawdown in the S&P 500 Index.
By James Picerno | The Milwaukee Company | jpicerno@themilwaukeecompany.com
The so-called fear gauge for the US stock market – the VIX Index – is widely monitored on Wall Street as a proxy for market uncertainty. When the VIX rises, it’s typically accompanied by a fall in equities (S&P 500 Index). Similarly, a spike higher in the VIX tends to be related with a sharp correction in stocks. As a result, developing context for the near-term path of the VIX is another tool for managing expectations on the outlook for S&P 500 drawdown risk.
The problem, of course, is that predicting a VIX spike is challenging, to say the least – the future, as always, is uncertain. But TMC Research’s VIX Risk Indicator (VRI) tries to minimize this challenge, if only on the margins, by focusing on periods when the VIX appears set to remain low/moderate. In turn, when those conditions aren’t present, one can infer that a higher risk regime may be likely.
In search of signal while minimizing noise, VRI is a composite of several analytical tools. Unsurprisingly, it’s not perfect, although it has at times served as a reasonable early-warning indicator just ahead of substantial increases in the VIX.
As shown in the chart above, when VRI is below zero, it tends to equate with a relatively moderate/low VIX level. By contrast, when a sub-zero VRI reading moves closer to a neutral (zero) level, confidence fades that the VIX will remain moderate/low. The implied forecast: moving from below-zero to above-zero suggests a relatively elevated probability of a higher VIX reading, if not a spike, in the near-term future (a shift that’s likely to be associated with lower stock prices that’s more than a garden-variety correction).
The current VRI reading is mildly negative (-0.24, as of 2:15pm eastern on Feb. 6). That aligns with a neutral reading for the VIX outlook. In other words, the near-term outlook for the VIX appears to be more or less a coin toss in terms of predicting if it’s headed higher or lower.
If VRI continues to slide, the implied probability will increase for expecting that the VIX will remain moderate in the near term. In that case, a sharp stock market appears unlikely in the days or perhaps week or two ahead.
Although it’s difficult/impossible to predict where VRI is headed, a decline toward a -1.0 reading would lift confidence for expecting relatively calm waters to prevail for the S&P 500 in the near term.
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