Spikes in market volatility have traditionally provided a good buying opportunity for US stocks, Credit Suisse (CS) says.
That may come as welcome relief to investors following after the jitters on global markets last week, when a sharp spike in the Cboe VIX Volatility Index (VIX) got plenty of attention.
Specifically, there were concerns that investment strategies based on shorting the VIX would have to be unwound, which could exacerbate losses.
But according to CS, a little bit of volatility is actually a good thing.
“History shows that investing following spikes in volatility tends to lead to above average returns for the S&P 500 in subsequent months,” the analysts said.
In the wake of Monday night’s stock selloff, the VIX rose from historic lows of around 10 to briefly eclipse a reading of 50, before closing the week at 29.06.
And Credit Suisse says that when the VIX rises above 20, stocks typically book in gains of around 6% over the following three months:
The VIX measures the degree of market moves in US stocks — either up or down — and is often used as the basis for trading strategies among professional investors.
As US stocks enjoyed steady growth throughout the course of 2017, the VIX consistently traded at or near all-time lows.
In that environment, basing trades on shorting the VIX index provided an easy way to make money.
But some investors got caught out last week when two investment vehicles linked to shorting the VIX imploded on Tuesday, losing almost $US3 billion in value.
And while the CS analysts highlighted a buying opportunity in the table above, the bank has also shown a fondness for shorting the VIX.
One of the two short-VIX investments was an Exchange Traded Note (ETN) run by Credit Suisse called the VelocityShares Daily Inverse VIX Short-Term ETN, or XIV for short.
In the wake of last week’s crash, CS subsequently announced that it plans to wind up the XIV by February 20.