On Friday, August 17th, $VIX made a new 1000 day low. Financial journals broadcasted this event, and headlines such as this and this are making the rounds. What can we take away from these articles?
…the VIX has spent over half of its time over the past two decades (from 1992 through Tuesday) between 10-20. So the level it’s at today is very, very normal.
“Be careful if you think the VIX has nowhere to go but higher”….the VIX has a history of remaining depressed during long periods of time — like they did between 2004 and 2007 when stocks slowly drifted higher.
Okay, easy enough. What we are witnessing with $VIX is not abnormal, but that isn’t information isn’t specific enough to help traders and investors. Let’s break the $VIX history apart so that we have information that is actionable.
We are going to start by looking at what happens when $VIX crosses beneath various moving averages. It is currently trading beneath its 10, 20, 50, and 200 day moving averages. We would expect this with it making a new 1000 day low.
The rules are simple: Buy $SPY at Close when $VIX Closes Beneath its X Day Average.
$SPY Buy-n-Hold is calculated by taking all $SPY history, breaking it into 50 day segments, and averaging the segments.
When $VIX is beneath the shorter (10, 20) moving averages, $SPY tends to track or slightly underperform its historical average performance. This is likely due to short-term mean reversion: as $VIX dips and stretches farther beneath the shorter moving average it will reverse for a brief period of time.
When $VIX is beneath the longer (50, 200) moving averages, $SPY tends to outperform its historical average performance. As $VIX stretches farther and farther beneath these longer-term averages, $SPY has tended to trend higher in a low volatility environment, enabling the outperformance.
Let’s dig deeper and look at the percentage of winning trades.
There have been 69 trades made¹ when $VIX crosses beneath its 50 day average. 68.12% of those were higher after 50 days.
There have been 55 trades made when $VIX crosses beneath its 200 day average. 60% of those were higher after 50 days.
The bottom line is that when $VIX is beneath its longer-term moving averages, $SPY has tended to outperform its historical average performance and there is a better than average chance that $SPY will be higher 50 days later.
The next post will look at what has happened after $VIX has made a new X day low.
¹Trades held the full 50 days. There are more than 69 trades made if each is not held the full 50 days.