What happens after huge single-day VIX spikes?

Black Friday, November 26, quickly became known as ‘Red Friday’ for stock markets as key US indexes recorded some of the sharpest plunges of 2021.

It was new COVID-19 variant fears which sparked the sell down. The the S&P 500 slid 2.3% and there was also an historical and worrisome spike in the Cboe VIX (volatility index.).

The VIX is viewed as the ‘fear gauge’ amongst US investors. It rose 54% on Friday. This was the 4th-largest single-day VIX increase in history.

So, how has the the S&P 500 performed in the weeks and months following such extreme VIX spikes?

Let’s look at the three other occasions in which the VIX has recorded greater spikes than what we saw on Friday.

February 5, 2018116%
February 27, 200764%
January 27, 202162%

Now, we can assess the S&P 500 total returns in the following week, month, six months and one year.

February 5, 2018+0.4%+3.2%+8.65%+5.2%
February 27, 2007-0.2%+1.5%+5.8%+0.6%
January 27, 2021+2.1%+1.8%+18.2%(10 month) +26.9%

Historically, the US market has rebounded strongly after extreme single-day VIX spikes.

One month, six month and one year returns are all positive following the three largest ever single-day VIX increases.

The week ahead, however, may be less certain if history repeats.

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