Category Archives: $VIX Studies
@JBoorman tweeted something that sparked my interest:
— Jon Boorman, CMT (@JBoorman) March 20, 2013
While the stat (largest 2-day $VIX spike on less than 1% 2-Day $SPY drop) seemed to be correct, I wanted to determine if this was truly a “big tell.”
Let’s test it and find out.
(To be clear, @RyanDetrick was the stat hunter that found the stat…)
- Buy $SPY at the close when $VIX 2-day change is greater than 15% and $SPY loses less than 1.5% over the same 2 days.
- Sell X days later.
- No commissions or slippage included.
- All $SPY history used.
Note that I relaxed the setup rules to try and get a good sample size. I also wasn’t sure if the original stat was using a 1 or 2 day $SPY drop. I opted for 2 since it was symmetrical with the large 2-day $VIX spike.
The graph above shows the averaged performance of all trades after this setup.
Over an intermediate term, the market gets back to bullish business as usual. Short-term, however, the market tends to pullback after this setup.
There was 41 occurrences of this setup. There were 35 trades made with 29 held for the full 50 days.
I’m not sure if it is a big tell, but it is interesting that the increase in fear does tend to weigh on the markets over the next week or so.
Today the $VIX, or CBOE Volatility Index (aka the fear index) posted a one day gain of 34%. Let’s look at the ramifications of this rare event.
Using $VIX history going back to 1990:
- There are only 19 times in the past 23 years that $VIX posted a 1 day gain greater than 29.99%
- The largest 1 day $VIX gain was 64.22% on February 27, 2007.
- $VIX posted 1 day gains of greater than 29.99% on 4 occasions in 2011, the most of any year
- In 2012, $VIX never posted a 1 day gain greater than 29.99%
What’s Happened Over the Next 100 Days?
We will buy $VIX or $SPY at the close after $VIX posts a 1 day gain greater than 29.99% No commissions or slippage included.
- There were 19 occurrences of the setup on $VIX with 11 trades held the full 100 days.
- There were 14 trades made on $SPY with 9 trades held the full 1o0 days.
- The Left Axis has $SPY average profit or loss.
- The Right Axis shows $VIX average gain or loss.
There are not many samples, so I am cautious of drawing strong conclusions. However, it is safe to say that this setup is not bullish. I like to think about the effect of a volatility explosion being similar to the effect of throwing a large rock into a still pond. As the waves travel outward from the impact, they get smaller and smaller over time and distance. Although the immediate effect is over fairly quickly, the waves take some time to diminish. Indeed, we see that relationship expressed rather elegantly in the graph above.
Previous Posts on Volatility Explosions:
…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.