U.S. stocks reversed sharp losses Wednesday to notch modest gains. The turnaround followed a rebound in crude-oil prices and occurred in the wake of weak U.S. economic data.
A little-known event in the CBOE Volatility Index (^VIX) may be flashing a warning sign that the market will see a big downside move this year.
To be sure, the VIX itself is a popular
measure of expected volatility in the S&P 500 (^GSPC). Options and futures
contracts against it vigorously trade hands every day.
And since the start of the year, the VIX
has been elevated, something that happens when the market is worried. For most
of 2016, it has been trading mostly above 20. That’s well above times of
complacency, such as the period from mid-2012 to mid-2015, when the index was
often found in a range between 11 and 20. The VIX’s counter-market tendencies
lead some to call it the “Fear Index.”
Based on past data, the S&P 500 sees a big move after the VIX goes back to contango from backwardation. Almost 90% of the time, the market has moved over 20% over the next year, studies show. That's 20% higher or lower.
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