With stocks trading near record highs, the CBOE Volatility Index (VIX) — or the stock market’s “fear gauge” — is just off a record low, and recently wrapped up its longest-ever stretch in single-digit territory. Against this backdrop, and considering the VIX tends to move higher in August, options traders have been picking up VIX calls at an accelerated clip. What’s more, one options indicator we watch just sent up a signal not seen since May 2014. Below, we’ll take a look at the recent options signal, and what it could mean for the S&P 500 Index (SPX).
The 10-day moving average for the Options Clearing Corporation’s (OCC) put/call volume ratio on the “index/other” category just fell below 0.85 for the first time since May 13, 2014, according to Schaeffer’s Quantitative Analyst Chris Prybal. Per the OCC, the “index/other” designation refers to cash-settled products — essentially, excluding stocks or ETFs — and the monthly volume report indicates that 95% of July’s volume was generated by the SPX or VIX. Specifically, 57.87% of the July volume revolved around the VIX, with the SPX accounting for 38.49%.
To determine what this extreme reading might mean for stocks, Prybal ran the numbers to see how the S&P 500 has performed after previous occasions where the 10-day moving average of this ratio has fallen below 0.85. Following the previous three signals, the S&P underperformed in the short term, averaging a two-week (10-day) loss of 1.1% — compared to an average two-week gain of 0.5%, going back to 2013.
However, by four weeks (20 days) out, the S&P began to outperform, generating stronger-than-usual average returns all the way to the 60-day marker. In fact, the S&P was higher 100% of the time at every single checkpoint after the four-week marker, and averaged a six-month gain of 8% after a signal, compared to 5.5% anytime.
Granted, this is one single indicator, and it’s based on an extremely small sample size — so this study is best considered within the context of a broader technical and sentiment analysis of the stock market right now. In the figurative “laboratory environment,” though, this signal is pointing to short-term underperformance for the SPX, followed by longer-term outperformance.
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