The Cboe Volatility Index, or VIX, has more than doubled in the past week, and it added another 6% on Thursday as fears of a major market correction came to the forefront of investors minds.
The VIX reflects expectations for volatility in the S&P 500, and it trades inversely to the benchmark roughly 80% of the time. The index is often known as the stock markets “fear index” because it tends to jump during periods of uncertainty and worry.
At the root of the selling are concerns over inflation and rising interest rates, which have caused a major sell-off in global equity markets over the past two trading sessions.
Early in the day the VIX hit 24.52 — its third-highest level of the year, beaten only by major spikes in March and February, when the VIX hit a peak of 29, its highest level since the Chinese market sell-off in August 2015. By 11.30 a.m. ET the VIX had pulled back from the worst of its losses, and was at 23.73.
The U.S. stock market saw extreme volatility on Wednesday, a session that not only represented the worst single session for major indexes in months, if not years, but was a rare example of a steep move in either direction. Stocks continued the carnage on Thursday.
The Dow Jones Industrial Average DJIA, -0.37% suffered its biggest one-day drop since February in the prior session, shedding 3.2%. The S&P 500 SPX, -0.44% lost 3.3% in its fifth straight daily decline, its longest such losing streak since November 2016. The Nasdaq Composite Index COMP, +0.28% fell 4.1% in its biggest drop since June 2016.
The Cboe Volatility Index VIX, -1.13% jumped nearly 44% on Wednesday, a spike that took it back above its long-term average between 19 and 20, a level it has been comfortably below for much of 2018. The VIX, which uses S&P 500 options to calculate expectations for volatility over the coming 30 days, has roughly doubled thus far this year.
Wall Streets so-called fear index saw similar turmoil in the first quarter of 2018, another period when fears over inflation and interest rates spurred heavy selling. In fact, Wednesdays jump was the third session in 2018 where the VIX climbed at least 30% in one day. With about 2 ½ months remaining in the year, this has tied the number of total occurrences seen in all of 2017, according to Dow Jones Market Data. Should it see another session with a gain of this magnitude—it has never dropped 30% in one day—that would tie a record posted in 2011.
In terms of relatively smaller moves for the VIX, 2018 already stands as a record. Wednesday was the sixth session of the year in which it gained at least 25%, the 10th where it gained at least 20%, and the 11th one-day move of 20%, including both rises and falls of that magnitude. All three represent records for a single calendar year.
Wednesdays decline represented the first time that the S&P 500 closed with a move of 1%, in either direction, since June 25. That degree of calm is extremely unusual. According to Bespoke Investment Group, the benchmark index saw an average absolute daily change of about 0.24% in either direction over the month of September, well below the 0.7% average seen throughout the bull market.
That a 1% move should appear in October shouldnt come as a surprise. According to Ryan Detrick, senior market strategist at LPL Financial, October should be known for volatility, not crashes, as no month has seen more 1% changes for the S&P 500 index going back to 1950. Per LPLs data, there have been 362 such moves in October, significantly more than any other month. The average is about 285, while August, the month with the second-highest frequency of 1% moves, saw 304 between 1950 and the end of 2017.
According to the Stock Traders Almanac, October is known as the jinx month due to the number of major selloffs that have occurred in the past over the month. There were crashes in 1929 and 1987, the Almanac read, along with the 554-point drop on October 27, 1997, back-to-back massacres in 1978 and 1979, Friday the 13th in 1989, and the meltdown in 2008.
For all Octobers since 1896, when the Dow was created, the standard deviation of the Dows daily changes has been 1.44%. That compares with 1.05% for all other months.
Historically speaking, the Dow rises an average of 0.6% over the month, gyrations that make October the seventh-best of the year. Over the past 67 years, October has been positive for the blue-chip average 40 times and negative on 27 occasions.
The S&P 500 typically rises 0.9% over the month, which is also good enough for seventh place, based on historical averages. The benchmark index has the same ratio of positive Octobers to negative ones as the Dow.
For the Nasdaq, October stands as the eighth-best month of the year, based on data that goes back 46 years. It has historically risen 0.7% over the month, and October has been positive for the Nasdaq in 25 of the past 46 years.
For both the Dow and the S&P, October is the best month of the year in midterm years, while it is the sixth-best for the Nasdaq.
Ryan Vlastelica is a markets reporter for MarketWatch and is based in New York. Follow him on Twitter @RyanVlastelica.