VTS Volatility Barometer through all Market Crashes

VTS Community,

A member asked a question that I had to put together some charts to answer, so I thought I would just share the charts with everyone today as more of a data dump than anything else.  Now his specific question was:

How long does it usually take for the Volatility Barometer to get back below 60% after a Volatility spike?

Unfortunately, the answer is, it depends.  There's several variables because of course every market crash event is a little different.  The biggest factor though is how significant the event was and whether the market believes it'll be a long lasting problem or something that will just come and go.  As we look through these charts you can see what I mean.

- The charts themselves are showing the VTS Volatility Barometer levels through every S&P 500 market crash of 10% or more, and more specifically when the barometer went above 60% to the time that it dipped back below 60%.

* All the red arrows are showing where the maximum drawdown in the S&P 500 occurred.

The 2011 European Debt Crisis was a big deal!  Not only was it a large S&P 500 drawdown at nearly 20%, but it was a long lasting headline driven period of about 4 months.  Something that serious is going to take a while and as it happened it was almost 2 months after the market bottomed that the Volatility Barometer dripped below 60% and stayed there.

The China hard landing scare in 2015 also took a couple months to really settle down.  There were back to back HUGE VIX spikes of 45% on the Friday and Monday to kick things off.  Due to the severity, the market itself clearly felt this was a major issue that would take a while to work through.

The 2nd leg down in late 2015 and into 2016 wasn't as abrupt or scary, and as a result the Volatility Barometer quite quickly returned to lower levels after the S&P 500 bottomed.

The 2018 Volpocalypse event on February 5th is burned into our memories forever.  Because it was such a huge shock to the system, it took a long time for Volatility to settle back down.

The Q4 2018 market decline was an interesting one because although the stock market was down more than it was in the February Volpocalypse, Volatility was more muted because this was a slow moving train of a decline that took 3 months.  The market had plenty of time to absorb what was happening and as a result, the Volatility Barometer recovered shortly after the market bottomed.

The Pandemic in 2020 could also be viewed in many ways similar to something like the Volpocalypse or European Debt Crisis.  A massive shock to the system that was clear early on was going to have some staying power.  It took several months for the Volatility metrics to normalize.

2022 was the slowest moving train market crash we've ever seen, where if you notice the Volatility Barometer levels weren't even that high.  Mostly in the 60's and 70's, which for a market that crashed well over 20% was odd to say the least.  All the other market crashes of similar magnitude took the Barometer levels into the 80's and 90's.  I guess the only silver lining here is that it also didn't take long after the market bottomed for us to get back into trades.

The 2nd leg down in 2022 was averaging even lower levels.  The Volatility Barometer only breached 80% once, which has never happened before and I suspect, may not ever happen again.  It's hard to know why Volatility didn't spike in 2022, but as of now it's an outlier year that I don't pay a lot of attention to. 

I'd rather optimize my portfolio for what happens 9 out of 10 times, rather than try to optimize for something that only happened once.

I'm not sure 2023 fully counts because the drawdown from 2022 was not yet recovered from, but there was another mini crash lower that year.  Volatility didn't spike much, it wasn't that big of a deal, and you can see that the market largely expected things to settle down because the Barometer quickly dipped back below 60%

That brings us to these past couple weeks.  Now technically on a close to close basis the S&P 500 only had a -8.49% drawdown.  Intraday it got worse than that though so keep that in mind.  The VIX spike to 65 happened in off hours for the S&P, so who knows how much worse it would have been had it happened during market hours.

The market bottomed last Monday, and here we are 5 days later and the Volatility Barometer is already getting close to dipping below 60% again.  I can't predict when that will happen, but if nothing scares this market soon, it could be days away.

Apparently, whatever scared the market and the VIX is a non issue ?