A gap higher probably wasn't what bulls wanted to see today, but they are making it work for now. It is vital that bulls hold onto the move higher today as precious metals and Treasuries are still seeing fear buying, and we all know what volatility has done the past few days.
The move in volatility has been astonishing, really. Yes, there have been bigger moves, but with a gain of more than 10% yesterday, the Volatility Index (VIX) saw its first time with three straight days of gains of more than 10%. That's a huge move. It easily explains the Fear & Greed Index coming in at zero -- in other words, extreme fear. I would probably classify that as extreme, extreme, horror-show fear.
Me, I like visuals. What does it mean when the VIX closes higher by 10% or more per day for three straight days?
First, it is important to note that these big drops and rebounds, along with elevated volatility, are not associated with bull markets. While they are the trademark of bear markets, they are also paramount in a correction. We've seen the small-caps correct while energy appears to be teetering on a bear market move nearly 20% off the highs. The S&P 500 has thus far avoided either label.
Second, the chart below provides a good visual of what this type of move in the VIX has meant previously. I've plotted the VIX daily moves of 10% or more vs. moves of less than 10%. There is no extra weight if a move was 20%, and 9.9% registers as a zero. This is a daily chart, so the weighting of the lines helps demonstrate the bunching of large VIX moves. Then I plotted the SPDR S&P 500 (SPY) behind the VIX bars.
SPY vs. VIX
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What's clear to me is that the bunched bars are evidence and support of moves lower. This is common sense. Higher volatility is associated with moves lower in equities. Another thing becomes evident to me: When the VIX has big drop clusters, the SPY doesn't tend to snap back higher. Those looking for a "V" bounce had better hope this cluster doesn't expand. Right now, the cluster does not yet resemble those seen in 2008, 2010 or 2011, but it is starting to get the look of summer 2012.
In all, it is still a time to be cautious. The bounce today is a solid start, but if these clusters pick up any more speed, traders are likely looking at six months or slightly more before seeing levels of $190 to $195 again on the SPY, once the clusters disappear for at least one month.
At the time of publication, Collins had no positions in the securities mentioned.