Increased VIX Stress Forecasts Mid-Term Stock Slump
Updated
The recent COT data indicates a sharp increase in stress levels in the VIX. This suggests that market participants are preparing for a rise in volatility, which is usually associated with falling stock prices. Looking at the COT history of the VIX, we can infer the stock market movements during similar stress level increases (green horizontal line): We observed similar phenomena in February 2013, June 2014, October 2016, June 2018, August 2021, and September 2023. We see that all these periods were associated with events that caused increased volatility. Notable mentions include the onset of the Ukraine crisis in the summer of 2014, the US elections in 2016, significant sell-offs in the second half of 2018, and the precursors to the open Ukraine war in the second half of 2021. As the price movements show us, these events did not mean the end of the world. However, it is notable that we are currently in a similar situation, particularly regarding the upcoming US elections. Based on this analysis, we must assume that significant, albeit temporary, price declines are to be expected at least in the medium term.
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