VIX Spikes: Should You Buy The Market Dip?

The CBOE Volatility Index, or VIX, is up 45% this month as of mid-morning Nov. 18 trading.

The rare November volatility spike hit U.S. markets just as the S&P 500 index broke below its 50-day moving average for the first time in 138 sessions. This raises the question many retail traders obsess over in moments like this:

Is this a buyable dip or the start of a deeper pullback?

See Also: Everyone’s Bullish, Cash Is Gone—What Happens If The Fed Doesn’t Cut?

S&P 500 Bull Trend Streak Cracks — Now What?

The S&P 500 closed below its 50-day moving average on Monday after staying above it for 138 trading sessions.

LPL Financial chief technical strategist Adam Turnquist said Monday's close below the 50-day moving average ended the index's longest stretch above that level since 2007 and the sixth longest in 75 years.

This type of break has happened only 17 other times since 1950. On average, the index returned:

• 0.8% over one month
• 3.0% over three months
• 5.4% over six months
• 6.2% over twelve months

The index finished higher 65–77% of the time, depending on the horizon.

For comparison, typical S&P 500 returns are 0.8%, 2.3%, 4.6%, and 9.5% over those same periods.

In simple terms, this kind of breakdown can sting short-term, but it doesn't usually kill the whole bull market.

“While history suggests this break isn't inherently bearish, the index also fell below the lower boundary of its rising price channel yesterday. Key downside support now sits near the November lows at 6,631 and October lows at 6,550,” Turnquist said.

What The VIX Says

Months when volatility spiked at least 45% are rare and clustered around disruptive events:

• April 2022: 62.4%
• Nov. 2021: 67.2%
• Jan. 2021: 45.5%
• Feb. 2020: 112.9%
• Oct. 2018: 75.2%
• Feb. 2018: 46.2%
• Aug. 2015: 134.2%
• Jul. 2011: 52.9%
• May 2010: 45.4%
• Oct. 2008: 52%
• Sept. 2008: 90.75%
• Jul. 2007: 45%
• Feb. 2007: 48%
• Aug. 1998: 78.6%
• Oct. 1997: 53.2%

The current move would mark the largest monthly rise since April 2022, when inflation fears and rate hikes smashed risk sentiment.

Historical data compiled by Benzinga shows how the SPDR S&P 500 ETF Trust (NYSE:SPY) reacted in the 14 previous VIX shocks of this size.

S&P 500’s Forward Returns After A >45% Monthly VIX Spike

So, Should You Buy?

History shows that a 45% monthly jump in the VIX has never been a neutral event.

Over the last 14 episodes since 1997, the S&P 500 averaged a 2.98% loss one month later and finished lower in half of those episodes. That means "buying the first dip" after a volatility shock has often been painful.

Three months out, results improve but remain mixed. Seven of those 14 episodes produced negative returns at the three-month mark, despite an average gain of 1.03%. The longer the horizon, the better the odds.

Six-month returns averaged 3.21%. Twelve-month returns averaged 8.7%, with gains in ten out of 14 periods.

The only major failures came during 2008 and the late-2021 bear market transition.

Put simply: when the VIX explodes higher, the next move is usually chop, not collapse. Patience mattered more than speed. Traders who waited for a second flush often got better entry points than those who chased the first red candle.

Now Read:

• Everyone’s Bullish, Cash Is Gone—What Happens If The Fed Doesn’t Cut?

Image created using artificial intelligence via Midjourney