Kensho Stats

Traders bet on another late-August volatility spike

A trader works on the floor of the New York Stock Exchange.
Brendan McDermid | Reuters
A trader works on the floor of the New York Stock Exchange.

As volatility plummets, some traders are starting to bet things have gotten too quiet on Wall Street and turbulence will return to the markets as the summer ends.

A data study showed a volatility spike in the fall months has been the trend and also revealed certain types of stocks can still perform during such a time.

"We are entering a historically seasonal time when Volatility i.e. VIX tends to bottom and begin a strong seasonal uptrend," Roberto Friedlander, head of energy trading at Seaport Global Securities, wrote in a note to clients Tuesday.

"The VIX closed below 11.5; historically when we have had a VIX <12 in August there was almost a sure bet that the VIX will be higher three months out by more than 6 percent with a fair possibility of an outsized move," he added.

Kensho, a tool designed to quantify historical market events, confirms Friedlander's call. Historically, when the CBOE Volatility Index traded below 12 in August, the fear gauge was up an average of 21 percent three months later, according to data from Kensho.

Since the VIX spiked around the time of the Brexit referendum, it has fallen 54 percent, hovering around a two-year low.

CBOE Volatility Index, two year

Source: FactSet

Friedlander is not alone in thinking this drop has been too steep given some of the risks lurking out there. Money flows show other investors are starting to pile into ETFs that mimic the performance of the VIX, he said.

If the VIX spike does occur, Kensho data shows the best groups to get behind include health care, technology and consumer staples — all which were up more than 6 percent three months after the VIX traded below 12 in August.

On the flip side, the worst-performing groups include financials, telecom and utilities — all down at least 0.17 percent, on average.

Even if they're not betting on a fear spike, Friedlander advises investors to at least taper their enthusiasm given the strong run in the market, and instead use caution when adding new positions.

"Post Labor day will be the time when money managers are likely to jump in on fear of missing further gains/Alpha — be careful of your entry points as one will likely see a spike in VIX which in turn means a lower market," he said.

Disclosure: NBCUniversal, parent of CNBC, is a minority investor in Kensho.