Keep an Eye on Wall Street's Outperforming 'Fear Gauge'

Core Viewpoint - The S&P 500 Index (SPX) is near its all-time high, while the Cboe Volatility Index (VIX) has risen to around 20, indicating increased market skepticism despite high stock prices [1][2]. Market Conditions - The elevated VIX suggests significant hedging activity, indicating that investors are cautious rather than overly optimistic about current stock prices [2]. - With the SPX closing within 2% of its all-time high and the VIX above 20, historical data shows that the SPX tends to gain an average of 3.71% over the next three months, compared to just 1.47% when the VIX is below 20 [3][4]. Performance Metrics - When the VIX is above 20, the percentage of positive returns is similar to when it is below 20, but the average positive returns are larger, indicating that sidelined capital may drive market gains [5]. - Historical data shows that the SPX has an average return of 0.42% over two weeks, 0.87% over one month, and 3.71% over three months when the VIX is above 20 [6]. Comparative Analysis - The short-term results indicate that the SPX averages a return of 0.93% over the next month with 74% of returns positive when the VIX is elevated, compared to a typical average return of 0.79% with 64% positive [8]. - However, longer-term results show bearish returns from three months to a year after elevated VIX signals compared to typical SPX returns [8]. Historical Context - The current setup with the SPX near its highs and the VIX above 20 is the first instance since October of the previous year, with 19 similar signals observed in the past month [9][10]. - Historical data since 1996 shows that the SPX has an average return of 0.38% over two weeks and 2.32% over three months across all instances, with a higher average return of 0.75% over two weeks and 1.72% over three months after the first signal in the past month [11].