Understanding the Strange Market Climate

The stock market has been acting strange as of late. The S&P 500 Index (SPX) sits in a type of “no-man’s land,” halfway between the all-time high at the beginning of 2022 and its October low. The index is about flat over the past six months. Nothing about that seems strange until you see some stats on how we got here, which I go over below. The VIX or “fear gauge,” is also behaving abnormally relative to the S&P 500.

Up Days Have Been Few but Large

The first thing that stands out is how few positive days there have been over the past 126 trading days (about six months). The chart below shows the up days over this time period. The average number of positive days is about 67.5 (the black horizontal line on the chart) but it recently hit as low as 51 and is currently at 54 days. It’s the lowest we’ve seen since early 2000’s. At that time, however, when the number of up days was just above 50, like now, the index was averaging a loss of about 20% over the prior six months. Currently, the six-month return is sitting at breakeven.

Since the market has been treading water over the prior six months, the gains on the positive days must be overwhelming the losses on negative days. Over the past 126 trading days, the positive day gains have averaged 1.32% while the average negative day has averaged a loss of 0.98% for a difference of 0.34%. The current level is depicted on the chart below by the horizontal black line. The only time it’s been higher was in early 2003. That difference was recently above 0.4% for the only time since 2000. Hopefully it’s good news that the only time we’ve seen a market with so few positive days but large relative to the negative days was in early 2003. That year, the S&P 500 gained 26%.

The VIX and Same Direction Days

As I mentioned above, the VIX is acting strange too. Recall, the VIX is a measure of implied volatility (IV) of SPX options. Implied volatilities usually increase when stocks fall and vice versa. In other words, the VIX usually moves in the opposite direction as the S&P 500. The chart below shows the VIX has been moving in the same direction as the market more often than usual. It hit 30% last December which has only happened a few times since 2000. It currently sits at 25% which is still elevated compared to its average of 20% since 2000 (the horizontal black line on the chart).

The next two charts, like the chart above, shows the percentage of days over the past six months that the VIX and S&P 500 moved in the same direction. The first chart only considers down days on the SPX. Since 2000, it has averaged around 22% (the black horizontal line on the chart). It currently sits above 30% but recently hit close to 40% which is the highest we’ve seen by far since 2000.

On the other hand, the same direction days on positive days for the stock market has been lower than average. Since 2000, it has averaged about 18% but it’s only been 13% over the recent six month period.

The VIX is moving down on stock market up days at a higher clip than normal and it’s moving down on up days at a higher rate than normal. Put more simply, the VIX keeps going down. Over the past 126 trading days, the VIX has been down 69 of those days. It recently went down over 75 days over a 126-day span. Before this, the highest level reached was just over 65 days which occurred in 2003 and 2009. The chart below shows how much of an outlier the VIX behavior has been lately. It seems especially odd that the VIX is low and has seen so few up days during a time where the perception seems to be that there’s a lot of uncertainty in the market and sentiment surveys, like those from Investors Intelligence and AAII, have shown pessimism over the last several months.