When the fear gauge swings

Key points:

• Last week's selloff shoved the VIX back into elevated territory 
• After similar volatility events, stocks have tended to recover over the medium term, with a historical edge that shows up most clearly at six to twelve months
• But the range of outcomes has been wide, and the worst cases are genuinely bad
• Bonds and gold offered limited hedging in these conditions, with neither providing a reliable standalone hedge across the full cycle

FFear has a track record

Friday hit like a splash of cold water. The S&P 500 dropped hard, the VIX broke above 20 for the first time in a while, and investors who had grown comfortable with the low-vol grind were suddenly asking what changed. The Volatility of VIX jumped to a two-month high. When the fear gauge itself starts swinging, people notice.

We've been here before. Not constantly, but enough to check the record. The broadest version of this signal, VIX 20-day historical volatility crossing above 120 with VIX above 20, has triggered 47 times going back to 1991. Three months later, the S&P 500 was higher 72% of the time with a median gain of 6.1%. By six months the median pushed t