When the VIX rises above its 50 day moving average, will returns be above average over the next 50 days?
As the chart above shows, $VIX has closed above its 50 day moving average for the last two trading days. Curiously, today it closed lower, but is still above the MA50. When $VIX rises, traders are typically a little squirrely, and seem to want to take on less risk. However, the test below appears to indicate that when $VIX rises above its MA50, the market may actually out-perform over the intermediate term.
The Rules:
- Buy SPY at close when $VIX closes above its 50 day simple moving average.
- Sell at the close X days later.
- No commissions or slippage included.
- All SPY history used.
The Results:
Summary of Results:
The graph clearly shows an edge to owning SPY after $VIX crosses above its 50 day moving average.
The SPY buy and hold line (blue) is generated by buying the index at inception and holding it 50 days, and then repeating the process at the close of day 50, until all history is tested over. Then the 50 day segments are averaged together.
Incidentally, creating a simple system that buys on a $VIX cross above its MA50 and sells to close the trade on a $VIX cross below its MA50 does nearly as well (within 0.5%) as Buy and Hold yet has reduced drawdowns, but that is another post for another time.
Buy the dips- statistically proven! Excellent backtest!
Thanks! There is likely a slightly more complex way to improve this, perhaps buying when $VIX is stretched x% above the MA50. I’ll take a look at that in the future.
Nice !!!
buying at gap fill this morning on S&P futures
Not clear on why you make the B&H comparison a “buy the SPY and hold for 50 days” – why not just buy at the first day of trading and hold till now?
Damian, essentially, that is what has been done. Its just that the Buy n Hold is split into 50 day increments, and those 50 day increments averaged together. This way it compares with holding the VIX/SPY trade for 50 days.
Hi Wood, great stuff as usual.
How about a test of VIX closes > SMA50 and then making a distinction between SPX above/below its SMA50? SPX < SMA50 has been a good filter against long entries on some systems, so one would think that requiring SPX above would give a boost.
But maybe not!
Good idea. I had the same idea. I will test it out in the near future.
Thanks -that is awesome!
Did LNKD increase its float?
The blogosphere was quoting a 7-9million share float vs 30mill shares traded Monday
Now Yahoo! Finance quotes a 42.57 million share float
Hey Woodshedder – don’t know if you saw my response on my post, but I asked if you have an email address or can send me an email to [email protected]. ;~)