After each surge in the VIX, how will the US stock market perform?

VIX, the CBOE Volatility Index, is the barometer of "panic" in the US stock market. It reflects investors' expectations of market volatility in the next 30 days. In simple terms, the higher the value, the more unsettled the market is.

Last week, the sharp rise in the VIX index undoubtedly sent an urgent warning to the market. The VIX index soared to 65.73 on August 5, hitting the highest level since the pandemic at 85.47, leading to a significant decline in the S&P 500 index. Subsequently, the VIX index closed at 20.37 on August 9, while the S&P 500 index rebounded to around 5300 points.

After tracking historical changes in the VIX index, Bank of America pointed out in its latest research report: in the 4 to 8 weeks following the first surge of the VIX index, the performance of the S&P 500 tends to struggle; when the VIX surges above 45 points within a week, the S&P 500 index often achieves higher returns in the following 13, 26, 39, and 52 weeks.

11 Panics, 4 Patterns

Bank of America's research found that since 1997, the VIX has panicked and surged above 45 points on a weekly basis 11 times.

These occurrences were in: October 1997, September and October 1998, September 2001, July and August 2002, October to December 2008, May 2010, August and October 2011, August 2015, February 2018, February to April 2020, and August 2024.

Among them, only during the 2008 financial crisis and the 2020 pandemic, did the VIX index close above 45 points weekly, and at that time, the S&P 500 index experienced significant declines.

Last week, the VIX index surged above 45 points on August 5, but then retreated slightly, closing at 20.37 on August 9. This indicates that compared to the previous two extreme situations, the current US stock market is relatively stable.

Analyzing historical data, Bank of America found that there is a certain regularity in the price trend of the S&P 500 index after extreme fluctuations in the VIX index, forming different bottom patterns. Specifically:

1. Rapid decline followed by a quick rebound, forming a V-shaped rebound: 1997, 2001, 2020

2. Rebound after two bottoms, forming a W-shaped double bottom: 1998, 2011, 2015

3. Forming a head and shoulders bottom consisting of left shoulder, head, right shoulder, and neckline: 2002, 2008-2009, 2010

4. Fluctuating between two converging trend lines, forming a triangular shape: 2018

This month, the VIX index has also experienced a sharp rise, but it is currently uncertain what bottom pattern the S&P 500 index will form. However, it is worth noting that, similar to 1997 and 2018, when the VIX index surged this time, the S&P 500 index was above its 40-week moving average.

After the first surge in the VIX index, the S&P 500 may fall into trouble in 4 to 8 weeks

Bank of America pointed out that when the VIX index surges above 45 for the first time, the S&P 500 index may perform poorly in the following 4 to 8 weeks.

Historical data shows that within 8 weeks after the VIX surges, the S&P 500 only rises 40% of the time, with both the average and median returns relatively low at 0.95% and -0.72% respectively. This is significantly different from the historical average levels. In contrast, since 1992, the S&P 500 has risen on average 66% of the time, with median returns of 1.41% and 1.95% respectively.

This lower short-term return, especially on the eve of the presidential election, coincides with the seasonal patterns of election years.

However, in the long term (13 weeks, 26 weeks, 39 weeks, and 52 weeks), the performance of the S&P 500 index after a surge in the VIX remains relatively robust, with returns usually significantly higher than historical averages.

Specifically, within 13 weeks after the VIX surges, the S&P 500 has an 80% chance of rising, with an average increase of 5.46% and a median increase of 5.17%. By the end of 52 weeks, the S&P 500 also has an 80% chance of rising, with the average increase rising to 14.07% and the median increase reaching 18.18%.

Review of past panic surges in the VIX index exceeding 45

Bank of America detailed the 11 instances in the past where the VIX index surged above 45 each week.

October 1997: Asian Financial Crisis

Due to the crisis, the VIX index surged to a high of 48.64 and eventually closed at 35.09. Impacted by the crisis, the S&P 500 index fell by 13% in the following 3 weeks.

However, it did not fall below the low point again. The S&P 500 index rebounded from the end of October 1997 and rose by 39.2% by the end of July 1998.

September and October 1998: Russian Financial Crisis and LTCM (Long-Term Capital Management) Collapse

The VIX index exceeded 45 multiple times but did not sustain for a week. The S&P 500 index fell, forming double bottoms in early September and early October. Subsequently, the S&P 500 index rebounded strongly from the lows, rising by 68.2% and peaking in March 2000

September 2001: 9/11 Terrorist Attacks

Due to the terrorist attacks, the VIX index soared to a high of 49.35, but eventually closed at 42.66. The S&P 500 index fell 39.2% from its peak in March 2000 and hit bottom on September 21. Subsequently, the S&P 500 index did not fall below the previous low point again, but started to rebound and rose by 24.6% in early January 2002.

July and August 2002: The Bottoming Process of the S&P 500 Index from Mid-2002 to Early 2003

In July and August 2002, although the VIX index briefly peaked above 45 points, it did not sustain for a week. During this period, the S&P 500 index began to form a head and shoulders bottom pattern, consisting of lows in July 2002, October 2002, and March 2003.

The VIX index gradually decreased in the following months, and the S&P 500 index also gradually rose from the low in October. From January 2002 to October 2002, the S&P 500 index fell by 34.7%, but then started a strong rebound, eventually rising by 105.1% in October 2007, reaching a peak that month.

October to December 2008: Economic Recession and Global Financial Crisis

Due to the financial crisis, the VIX index closed above 45 points for several weeks starting from October 3, 2008, and remained high until early April 2009. The S&P 500 index started to decline from the initial spike of VIX in early October 2008, hitting bottom in March 2009 with a decline of 39.3%.

Subsequently, the S&P 500 index rebounded strongly, rising by 82.6% by the end of April 2011. The VIX index reached a historical high of 89.53 at the end of October 2008. The S&P 500 index formed a head and shoulders bottom pattern from the end of 2008 to the middle of 2009.

May 2010: Flash Crash

From late April to early July 2010, the S&P 500 retraced by 17.1%. In the week of May 21, 2010, the VIX index briefly exceeded 45 points, but then fell back below 45 pointsAfter hitting bottom on May 21st, the S&P 500 index continued to fall by 4.6% and hit bottom again on July 2nd. Subsequently, the S&P 500 index started to rebound and rose by 35.6% in early May 2011.

From the end of May 2010 to the end of September 2010, the S&P 500 index formed a head and shoulders bottom pattern.

August and October 2011: Eurozone Debt Crisis

In the weeks ending August 12, 2011, August 19, 2011, and October 7, 2011, the VIX index broke above 45 points multiple times in the short term but did not sustain for a week. The S&P 500 index formed a double bottom pattern at the lows in August and October 2011.

After the rebound from the double bottom pattern, the S&P 500 index rose by 98.6% to a peak in May 2015. Before this significant rise, from early May 2011 to early October 2011, the S&P 500 index experienced a 21.6% pullback.

August 2015: Renminbi Depreciation

In August 2015, the VIX index briefly exceeded 45 points but then fell back. At this time, the S&P 500 index was in a downtrend with a cumulative decline of 12.5%. Starting from the low point in August 2015, the S&P 500 index rose by 13.4%, but then fell by 14.5% in early February 2016. During this period, the VIX index remained below 45 points.

Starting from February 2016, the S&P 500 index began a strong uptrend, rising by 58.7% until early January 2018.

February 2018: Several Short-Term Volatility ETFs Collapse (Also Known as Volmageddon)

In early February 2018, the VIX index experienced a brief intense volatility, soaring to 50.30 at one point but then falling back to 29.06. Meanwhile, the S&P 500 index fell by 11.8% within two weeks. Subsequently, the S&P 500 index rebounded by 16.1% from the lows in early February and reached a high point by the end of September.

Following that, the market experienced a deeper correction, with the S&P 500 index falling by 20.2%. However, this decline did not cause the VIX index to exceed 45 pointsFebruary to April 2020: COVID-19 Pandemic

At the end of February 2020, the VIX index briefly exceeded 45 points, then entered a period of high volatility, peaking at 85.5 by the end of March, stabilizing below 45 points only by the end of April. In late February, the S&P 500 index fell by 15.8%, followed by a further decline of 23.3% by late March, totaling a 35.4% drop, marking the market low during the COVID-19 pandemic.

Starting from the low point in March 2020, the S&P 500 index rebounded strongly, rising by 119.4% by January 2022.

August 2024: Uncertainties in the U.S. Economy, Geopolitics, and Yen Carry Trades

In August 2024, the VIX index experienced brief intense fluctuations, dropping from a high of 65.73 on August 5th to 20.37 on August 9th. Meanwhile, the S&P 500 index briefly dropped near 5100 before rebounding to around 5300.

Bank of America believes that the surge in the VIX index in August 2024 is similar to those in October 1997 and February 2018, occurring when the S&P 500 index was close to its 40-week moving average.

If the S&P 500 index needs more time to stabilize and find a bottom, a scenario similar to 1998 and 2010 may occur, where the index falls below the 40-week moving average and forms a double bottom or head and shoulders pattern.

If the VIX index continues to close above 45 points for several weeks, it may signal a severe market crisis similar to 2008-2009 or early 2020.