I awoke this morning to an email from the matriarch of CBOE-TV Holly Goodhart. She was preparing for her day with CNBC on in the background and something caught her eye. The following comes directly from her email –
I have CNBC on this morning, and they just spent a segment discussing this headline:
"Markets bottom when VIX is greater than oil."
This didn’t sound right to me for a few reasons, primarily because I recall many years with the price of oil in the teens. Yes, I'm old. However, since I love playing with numbers I got to work looking at the closing price of Oil versus VIX and gathered as much data as I possibly could get my hands on. For the price of Oil I used the daily WTI Cushing, OK number from the EIA and for VIX I used VIX from 1990 to present and to get a little more history I used VXO for 1986 through 1990.
The result is daily data for 30 years. As I was compiling and checking the data for errors I noticed that VIX and Oil were priced in line with each other on a pretty consistent basis. This was going on even through parts of the 1990’s. The table below shows that the average for VIX has actually been higher than for Oil several years and even as recently as 2002. Years where the average price of Oil was lower than VIX are highlighted in red.
This next table shows the number of days by year that VIX closed higher than Oil. From 2004 to 2007 it never happened. Then in 2008 VIX closed higher than Oil for the first time in year on October 22, 2008 with the S&P 500 at 896. VIX remained at a higher level than Oil for 82 trading days (with some gaps) through March 11, 2009 when the S&P 500 closed at 721.
After putting these tables together I decided to take a look at the CNBC article to see what they were saying. The article notes that the last two times VIX closed higher than Oil were August 24, 2015 (big surprise) and March 11, 2009.
My first issue with this is if you are using VIX versus Oil as a signal for a market bottom then when this happened on October 22, 2008 you would have considered that a bottom, it’s easy in retrospect to say we should have bought in March 2009 since that was the last time VIX was greater than oil. The price chart below is a daily two year chart of the S&P 500 beginning on the first day VIX closed higher than Oil. I put a box around the time period where VIX was consistently higher than oil.
Note that using the first occurrence of VIX closing over Oil would have gotten you in pretty early. Knowing that the last time this would happen was in March is great hindsight, but at the time would not have been a viable signal to trade on.
The other occurrence noted in the article was August 24th. We had a one day VIX over Oil close and that was it. The chart below is the daily price action from August 24th through last Friday. We have basically done a round trip in the S&P 500 since then.
With the markets in turmoil many market forecasters will try to call a bottom in the S&P 500. When they cite data be cautious and do some work. In this case long term history says that VIX higher than Oil doesn’t tell us much at all.