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Investors' nerves don't seem as frayed on Tuesday – and not just because the S&P 500 has found some stability following Monday's swoon into the close.

The CBOE Volatility index, or VIX, retreated 5.5 per cent in late-morning action, to 17.94. That followed Monday's 34 per cent spike in the so-called fear gauge, which was its biggest one-day gain since August 2011 – and the tenth biggest percentage increase since 1990.

In other words, this was a big move and it only makes sense to wonder what it says about the coming direction of the stock market. Unfortunately, the VIX says a lot about the current state of investor anxiety and very little about the future.

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Global Macro Monitor (via The Big Picture) looked at S&P 500 following the 10 largest spikes in the VIX, going back to 1990. There appeared to be little correlation.

On average, the S&P 500 followed with a decline of 0.29 per cent over the next five trading days, widening to 1.86 per cent over 10 days and 2.27 per cent over 20 days.

But these averages are swayed by some ugly numbers in 2008, when the S&P 500 plunged more than 23 per cent 20 days after the VIX spiked 34.5 per cent on Sept. 29. In terms of the number of negative days following a VIX spike, the results are mixed. For example, 20 days after a VIX spike, the S&P 500 has fallen four times but has risen five times.

The VIX may be saying a lot about investor anxiety right now – but it is more-or-less mum about how investors are going to feel tomorrow.

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About the Author
Investing Reporter

David Berman has been writing about business and investing since 1995. He has written for a number of magazines, including Canadian Business and MoneySense. He worked at the Financial Post as an investing writer and daily columnist before moving to the Globe and Mail in 2008. More

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