Watch What The VIX/VXV Ratio Is Showing

 | Aug 16, 2022 11:45AM ET

  • The VIX (volatility index) has declined for eight consecutive weeks, the longest streak in the last three years
  • The VIX/VXV measures the ratio between 1-month implied volatility and 3-month implied volatility
  • A VIX/VXV ratio below 1 is historically a buy signal for the S&P 500

    • During the last six U.S. recessions, the S&P 500 gained an average of +61% between its recessionary low and when the NBER declared that the economic contraction had officially ended.

    As a matter of fact, throughout the last 150 years, there have been 30 recessions in the U.S., and the S&P 500 managed to average a +6.9% annualized gain over that period (after adjusting for inflation).

    In the short term, markets are also rebounding as last week's better-than-expected CPI data encouraged investors to believe that the Fed may take its foot off the gas at its September meeting, raising interest rates by less than 75bps.

    The S&P 500 added its fourth consecutive week of gains, the longest since last November. On Friday, it also reached a significant milestone: it recovered half of the losses from its sharp decline earlier this year.

    The uptrend has a lot to do with the fact that the percentage of S&P 500 stocks trading above their 50-day moving average is 88% (in mid-June, it was 2%), a proportion not seen since the spring of 2021.

    For its part, the Nasdaq 100 managed to rise more than 20% from the June lows, which, according to technical orthodoxy, implies an exit from a bear market. From the high to the low, the tech-heavy index fell by 32.49% in 209 calendar days from November 19, 2021, to June 16, 2022. Over the past 50 years, the average bear market has seen an index fall -by 35.5% in 201 calendar days.

    h2 Watch What The VIX/VXV Ratio Indicates/h2

    The CBOE Volatility Index (VIX) has declined for eight consecutive weeks, the longest streak in the last three years.