Today, $VIX gained more than 30%. What do these huge gains in the fear index portend for the short and intermediate time frames?
The Rules:
Buy SPY at the Close if
- $VIX Gains More than 25% in One Day
- Sell at the Close X Days Later
- No Commissions or Slippage Included
- All SPY Data Used
The Results:
What stood out the most was that 68% of the trades closed higher the next day with an average return of 1.08%. Beyond that data point, what happens over the next month (20 days) was much as I had expected. It appears that a large one-day gain in $VIX might signal a shift in market psychology and thus should be warning sign to traders. Average returns did manage to claw back to breakeven twice 50 days later, so it may be better to be patient here than to panic. Of course with the entire EuroZone on the verge of unraveling, if one were to panic, I can’t say I’d blame him!
The best time to buy is when you’re most fearful.
Definitely.
Huge move on the VIX. Crazy. TRIN closed at 7.14 yesterday. It has only closed higher three other times in the last 20 years:
http://chart.ly/9po7yai
2 out of those 3 times, the next day closed up.
I’m curious how many times VIX jumped by 25% in bear markets vs bull markets.
Bozo, define Bear market for me and I’ll be happy to tell you.
Pretty sharp catch. Not so easy to define. I had an email exchange with Mark Hulbert on the same topic when two reputable analysts disagreed on the depths and durations of bear markets. (It was a big difference.) He said the same thing you did.
Maybe I can rephrase my question: do most big jumps in VIX occur when VIX is already elevated, say above 20, or below?
I can do that. I like that idea.
For me, I simply define a bear as when the index is trading beneath the 200DMA. Not perfect, by any means, but it is quantifiable and accessible by anyone with access to stockcharts.
Good idea, I think it’s a reasonable definition.
Most of the bear/bull analysis I see eyeballs long term trendlines and picks tops and bottoms from that, so a definition is either very complex or changes with time. It’s not wrong, but it’s making bear and bull decisions fit some preconceived pattern. I think I’d rather start with the definition and see where it gets us.
I like to use the 200 day definition also. It’s simple, and is as good as anything. Besides, it’s easy enough to tweak if you need to make it more sensitive.
So, buy a little TZA before the close today.