Does Wednesday’s volatility spike vindicate those predicting an important market top based on super-low volatility? Not by historical experience. The chart below flags super-calm markets over the past century. There are too many false flags for a positive assertion.
So what’s happened after volatility spikes? The table below from Charlie Bilello at Pension Partners reviews the top daily volatility spikes back to 1990. Most of the top-twenty shocks were false flags, at least on a near-term basis.
Conclusions? Extremely low volatility has not signaled important tops in any consistent manner. And huge volatility days haven’t consistently generated bearish follow through.
Volatility may have some role in the topping process. But observing record or near-record stability is not enough. Unless one is proposing a well-tested model, can we please stop obsessing over the VIX?
Chart 1. What’s happened after super-low volatility?
Table 1. What’s happened after huge VIX days?