Here's why this drop is not like the others: Trader

Is the VIX flashing a buy sign?
Is the VIX flashing a buy sign?   

Over the past few years, dips in the market and spikes in the S&P volatility index have been serious buying opportunities. But as the S&P 500 touches a five-month low and the VIX hits the highest level since 2012, one option expert is warning that this VIX spike might not be like all of the others.

"To me, maybe it's different this time," said Dan Nathan of RiskReversal.com.

On the chart of the CBOE Volatility Index, at least, the spike looks a good deal like four other recent ones, which have also taken the VIX above its long-run average of 20 (market in green).

In each case, the VIX quickly retreated back toward its two-year average of 14.30 (marked in yellow).

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And historically, as the VIX—which measures the price that investors are willing to pay for options, and thus tends to measure the amount of fear around stocks—has come back down, the S&P has soared.


"We've had these four instances where you had massive double-digit returns from the low of the correction and the spike in volatility," Nathan said Friday on CNBC's "Options Action," noting rallies from the lows of 20 percent, 10 percent, 12 percent and 16 percent. "And that's because investors have been conditioned to buy those dips."

However, the trader cautions against mechanically busting out the shopping list just yet.

Nathan notes that the S&P has returned to a major breakout level, and fallen below its 200-day moving average.


"This is really the moment of truth," Nathan said.

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Finally, a chart showing NYSE stocks above their 200-day moving average similarly paints a dour picture. According to Nathan, the sharp decline in this measure shows that the average stock has fallen below a key "smoothing mechanism" and lost its recent momentum.


"This is just telling you guys that momentum is waning at a time when volatility is increasing and the Fed is pulling back from QE," Nathan said.

And for him, that's a key point—the increase in volatility comes as the Federal Reserve ends its quantitative easing program and is openly talking about raising the key federal funds rate. The central bank's easing measures have long been credited with quashing volatility, but now volatility may begin to pick up in earnest, making the path for stocks a bit more complicated, according to Nathan.

"I don't think you buy this dip immediately," he concluded.


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    Melissa Lee is the host of CNBC's “Fast Money” and “Options Action.”

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