The VIX Could Be Getting Ready To Spike

David Dierking

March's volatility spike that saw the VIX climb into the 80s appears to be a thing of the past, but that doesn't mean the market isn't susceptible to another sharp and potentially violent rise.

In fact, if we look at the chart of the VIX, there are some patterns developing that could indicate another spike may be coming soon.

The 25 level has been key for the VIX going back nearly three years. It's provided resistance at several points, indicated by the four down arrows on this chart, but has turned into support ever since the bear market earlier this year, indicated by the two up arrows.

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The last time the VIX hit 25 in early June, volatility spiked and it led to a 7% pullback in the S&P 500. Since then, the market has calmed again and stock prices have resumed their rise.

Today, the VIX is back at 25 and the market is at an inflection point where we could be lining up to see the VIX bounce again. What kind of losses equities would see in such a scenario depends, of course, on the magnitude of the spike, but a 5-10% decline in equity prices wouldn't be unusual.

On the other hand, if the VIX breaks below 25 and stays there, it could usher in a new period of market calm. In those types of environments, risk assets tend to rise in price, which could result in the S&P 500 making an approach towards new all-time highs.

Given current market conditions, I think it's more likely that the VIX stays above 25 and equities struggle to make fresh gains here. The strength in gold, Treasuries and utilities support the idea that riskier assets are falling out of favor.

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