In a previous piece (https://www.plindia.com/blog/india-vix-vs-nifty-a-see-saw/) , we had forecast that the mid term VIX movements may allow Nifty to bottom out but that it may reach 20 levels around election time. Now that we are already there, what do we do next!
The Fear Gauge
The VIX captures the best quotes for Out of Money Put and Call options to judge the rise in expected volatility – so the one thing thats surely embedded in the VIX is perceptions of forthcoming volatility- though direction is not clear. Learn more about India VIX at https://www.plindia.com/blog/what-is-india-vix/
Since volatility is always seen as a risk, it is almost always correlated to market falls – and indeed past evidence supports this hypothesis. Our earlier articles had presented evidence on this.
Evidence
In the last one week, India VIX crossed 20 levels again. And that raises some alarms.
We decided to look at all instances since 2013 where India VIX crossed 20 levels for the first time and what happened in the next 10 days to Nifty – just to see if the impact is substantial, and immediate. The evidence is somewhat mixed – In Fact, 55% of the time, the Nifty actually generated positive returns in the subsequent 10 days! So the near term relationship seems slightly tenuous.
| Date | Nifty Level | Vix Level | 10 Day Return Nifty |
| 24-Jun-13 | 5590 | 21.01 | 3.96% |
| 2-Aug-13 | 5678 | 20.89 | -4.87% |
| 16-Aug-13 | 5508 | 23.64 | -0.65% |
| 23-Oct-13 | 6178 | 20.35 | 0.60% |
| 6-Nov-13 | 6215 | 20.25 | -3.48% |
| 12-Nov-13 | 6018 | 20.86 | 0.65% |
| 20-Nov-13 | 6123 | 20.83 | 0.62% |
| 31-Mar-14 | 6704 | 21.62 | -0.43% |
| 30-Jan-15 | 8809 | 20.17 | -0.04% |
| 4-Feb-15 | 8724 | 20.05 | 1.97% |
| 12-May-15 | 8127 | 20.55 | 2.61% |
| 24-Aug-15 | 7809 | 28.13 | -3.20% |
| 22-Sep-15 | 7812 | 20.35 | 4.06% |
| 18-Jan-16 | 7351 | 20.23 | 1.42% |
| 20-Jan-16 | 7309 | 20.97 | 1.30% |
| 8-Feb-16 | 7387 | 20.26 | -2.07% |
| 15-Nov-16 | 8108 | 20.15 | 0.42% |
| 6-Feb-18 | 10498 | 20.02 | -0.96% |
| 8-Oct-18 | 10348 | 20.15 | -1.94% |
| 11-Oct-18 | 10235 | 20.55 | -2.00% |
| 22-Oct-18 | 10245 | 21.36 | 2.72% |
| 30-Oct-18 | 10198 | 20.50 | 3.71% |
| 26-Nov-18 | 10629 | 20.40 | -1.32% |
| 10-Dec-18 | 10488 | 20.44 | 1.67% |
So now we know it doesnt necessarily mean that a VIX of above 20 is necessarily negative (over a 10 day period – longer time frames it turns more and more decisively effective) in the near term, we also looked at whether the price changes themselves become more erratic- Surprisingly, the 10 day average price change range in Nifty since 2013 is 2.4% while in the above sample it is 1.94% – lower rather than higher, probably because the index becomes volatile and rangebound at these levels.
In summary, while VIX increasing is of course indicative of expected rising volatility – maybe budgets, elections and/or plain and simple market corrections anticipated by large options traders – it is not necessarily deterministic. Look at other variables , fundamental and technical, as relying on VIX alone may catch you off guard more than 50% of the time!