VIX Teasing Seven Down Days in a Row, with Interesting Performance Implications

The VIX has been down six days in a row and is currently up a few pennies.

Assuming the VIX closes down again today (a fascinating thought in and of itself given the increasing Fed hawkishness as well as concerns about a Russian escalation in Ukraine), what might the string of declines portend for stocks going forward? I pose this question because I think the historical data is telling, with 30 such instances of 7-day declines in the 33 years of VIX data going back to 1990.

What typically happens to stocks when the VIX falls seven days in a row? Not surprisingly, if the VIX is continuing to fall, then stocks are almost always continuing to rise, to the point they become overbought. Going forward, stocks have a tendency to see a one-day decline and some slight underperformance during the course of the next few days and up to a week. At some point, whatever had been the fundamental driver of the decline in the VIX begins to regain control of the price movements in stocks and stocks move up sharply, with a high likelihood of outperforming the long-term average moves in stocks.

In the graphic below, I show the movements in the S&P 500 Index following a 7-day decline in the VIX relative to the average moves in the SPX during the same period. You can see that the relative underperformance lasts five days, at which point the overperformance kicks in, with the maxim outperformance coming after 100 trading days.

(Click on image to enlarge)