Friday was the tenth day in a row when the VIX closed above 30 when it closed at 34.74 on Friday. 

The VIX is an index of implied volatility in the options market. It is generally considered proxy of sentiment.  When the VIX is high, investors are fearful, and when the VIX is low, investors are confident.

Since the inception of the VIX, there have been six occasions when the index went above 30 and closed above those levels for 10 consecutive days.  Friday marked the seventh period.  I was curious to know how the stock market has reacted during the six previous occurrences.

The first period was during the Asian Contagion in 1997.  The second was during the collapse of LTCM.  The next four occurred during the bear market of 2000-2002 and the collapse of the tech bubble. 

The time periods are delineated by the first day when the VIX rose above 30. The last day was when the VIX closed above 30 before closing below 30 for two consecutive days.  During the 2000-2002 bear market, on several occasions, the VIX would close below 30 for one day only to pop above 30 again the following day.  However, when the VIX went below 30 for two consecutive days, it remained below 30 for an extended period of time.  Thus, I marked the last day before when the VIX went below 30 for two consecutive days as the end of the time period.  

The Asian Contagion was unique in that the market bottomed on the first day the VIX went above 30.  It also marked the shortest of the six episodes, with the VIX remaining above 30 for 17 consecutive trading days.  Otherwise, the average duration of each period was 40 trading days.

The average return of the S&P 500 a month after the VIX went above 30 for at least 10 consecutive days  was -3.0%, with every occurrence registering a monthly decline except the Asian Contagion.  Excluding the Asian Contagion, the average return was -5.4%.  Two months after the VIX went above 30 for 10 consecutive days, the average return was 0.1%, -1.6% excluding 1997.  Three months later, the average return was 2.5%, with only returns following the July/August 2002 episode being negative.

Since the end of each period is known only in retrospect, the returns from the beginning of the occurrence to two days after the VIX closed below 30 averaged 1.4%, or -0.2% excluding 1997.

Even though the average duration of each period was 37 trading days, the number of days from the beginning of each episode to the near-term bottom of the market was much shorter at 15 trading days, 18 days excluding 1997.  However, the dispersion was very wide, with the bottoms occurring fairly quickly except during the last two episodes, which were drawn out and marked the bottoming process of the 2000-2002 bear market.  The average return from the first day of the occurrence to the intra-day low was -10.5%, -12.5% excluding 1997. 

One should not be too reliant upon history when extrapolating past events to the present given that every episode is different. However, a framework is always useful, at least to understand market behavior in the past. 

How does 2008 compare to prior time periods?  Assuming that the lawmakers get the bailout bill passed this weekend, if the market goes higher from here and if the VIX were to close below 30 for two consecutive days, the bottom will have occurred two days after the 10-day period began, less than the average duration of 15 trading days.  The average return to the low would be -3.0%, also less than average of -10.5%.

I think this time period does not most resemble the Asian Contagion, given that the economy was stronger then and the crisis represented less systemic risk to the global economy and financial markets.  However, it does not seem like 2002-2003 either, when the market was in a long, drawn out process of bottoming.

Thus, using this framework as a guide, perhaps what we can expect is for the market to sell off after the bailout bill is signed, with the market hitting new lows before bottoming mid-October then rallying into the end of the year.

Again, to emphasize, one should be careful extrapolating past market behavior based on six episodes and very different economic and financial market environments to the present.  However, it is interesting to know how the market has behaved in the past.