More Research on Large $VIX One Day Gains

Today’s post on what happens after large $VIX one-day gains generated some questions in the comments section. This post will parse large $VIX gains for the fun of it, and to answer the questions.

First, let’s look at the dates for all $VIX one-day gains of more than 25%. Bear in mind that 25% is arbitrary. I chose it primarily because yesterday’s %VIX gain was ~30% and I wanted to increase the sample size.

Dates for $VIX One-Day Gains of More Than 25%

Note that the bulk of the large $VIX moves (15 of 22) have occurred between 2007 and the present. In fact, almost one quarter of all the large moves have happened in 2011, and the year is not yet over. Contrast this with only four one-day gains of more than 25% in 2008.

 

 

 

 

 

 

 

 

 

 

 

Now let’s look at all one day $VIX gains of more than 25% when $VIX had closed the day before above 20.

 

 

 

 

 

 

 

 

And let’s also see large $VIX moves when SPY was trading beneath the 200 day moving average.

 

 

 

 

 

 

 

What can we make of this? I’m not sure, really, but I have thought or two.

The 2007 large moves did not occur when $VIX was already trading above 20, and they happened above the 200 day moving average. Perhaps a succession of $VIX surges is a precursor to an extended period of volatility? Especially, when for all intents and purposes, the market is in a Bull phase?

It appears that the singular event of a large $VIX gain is not that big of a deal when the market is above the 200 day moving average and $VIX is beneath 20. While in most cases, after a large move, the market consolidated or stayed range bound for several months or more before roaring back to life, in 2001, there was much more Bear Market ahead. Perhaps 2001 is the anomaly.

What makes the most sense to me is that when $VIX is stringing together large moves within a one-year period, we should expect a Bear Market type of trading environment going forward. In other words, once volatility ramps up, we can expect volatility to persist, until it, ahem, no longer persists.

Perhaps a way to use this information is to bias our trading towards a  Bull Market, low volatility and trending market  once we have traded for X months without a large one-day $VIX gain.

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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!

 

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The ROC Indicator has been long since October 18th. The current trade is managing to hold on to a small gain of 0.47% (commissions not included).

The signal to exit the long trade will be triggered when the ROC252 has closed for a second day beneath the ROC5.

It is hard to predict when this might occur since doing so would mean I could see the future. But with volatility remaining high, a cross could occur very quickly.

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It hasn’t been the market.

We’re back from an extended weekend getaway in the mountains of Virginia.

My son took this picture Sunday morning. The fishing was decent but the time away from the world was priceless.

I’ll be back Wednesday to sort out the markets…

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I have a feeling I might lose my coonskin cap and possum skin seat covers on account of writing this post. I’ve decided to write it anyway, if for nothing else, to give my due to the Blogfather.

You see, I have to admit, after Fly wrote about joining the Tea Party, I almost let loose a good ‘ole fashioned Southern rant in the comments section of his blog post. I didn’t because his focus was on the fundamentals, with little detail on the philosophy of the matter. The truth is that the philosophy of tea drinking is rather, well, not masculine, and it may lead to lisping, cardigans, and scarves. Real men drink coffee. We leave the tea to folks like Jason Treu.

But for some reason, the Teavana story stuck with me. Maybe it was the bit about educating the ‘Merican public about tea drinking…After a few days of ruminating upon the matter, it became clear to me that there might be a real market for the stuff. I began to think about Crocs, and Chipotle, and Netflix, and Starbucks, and the various other fads that have consumed the American consumer. Teavana seems to have element of both Crocs and Starbucks in that Tea could become the latest fad (Crocs) while also tapping into our need to appear cultured, smart, and hip (Starbucks).

So the other night, my five year old boy and I were killing time in one of the newest, fashionable, outdoor town centers. And by town center I mean mall. You know, the ones that are supposed to make you feel hip because you have to walk outside to get to the stores. Or maybe it makes you feel like you are getting exercise. I don’t know.  Really, it is the perfect setup for a five year old because he can run like his ass is on fire, jumping, spinning, and stuff and I don’t have to yell at him for it. If we were inside, I’d be yelling.

In between him reaching into the fountains and pulling out pennies and then throwing the pennies back in, I noticed a Teavana store. As we began to walk by it, there was no way I was going in it. No way. Culturally, my brain could not handle it. But as luck would have it (or maybe it was fate?) there was an attractive girl and boy offering samples of tea, just outside the store entrance. “Would you like to try some tea?” he asked. Dayum. It smelled really good, and it was free. For a moment, I thought that the girl would probably think I was some sort of redneck cretin if I did not agree to try the sample. I reluctantly asked what flavors they were offering. One of them had some fruit and stuff in it. I knew that if I tried that, I might be forever changed, so I opted for the chai blah blah mixed with the Asian-sounding something or other.

That’s my little guy hiding from the camera. Notice the samples on the tray to the right…

Fuck, that tea was excellent. Not only excellent, it was treuly enjoyable.

I tried to play it cool and uninterested. Just to be safe, I executed a three point shot with the tiny cup into the store trash, from about fifteen feet outside the entrance. That will show them, I thought.

Ten minutes later, under the pretense of taking a picture of the store for Fly, I was back in Teavana. I began to feel like a creeper, taking a picture without buying anything, and secretly, I wanted to buy some to bring home and impress my wife. She’s more cultured than I am.

I smiled and approached the counter. Luckily, the girl helped me. Something about buying tea from a boy about the same age as my oldest son bothered me. In addition, he was all knowledgeable about all things tea. I found myself feeling less-smart in his presence. The girl probably sensed that my first experience needed to be non-threatening, and so she stepped up to the counter.

I said I wanted to buy the stuff that I sampled. She explained it was a blend of two teas, and did I want them mixed? I was immediately bewildered, but I pulled myself back together. Much to my chagrin, I inquired about the price. Holy fuck!

And then I realized the genius that is Teavana. Once you decide to cross that line, that is, to buy hipster tea in a fancy store, you can’t balk at the price. They will see through you in an instant if you show the slightest surprise at paying upwards of 20 bucks for 4 ounces of tea. Also, you need the air tight canister for another 7 bucks because the last thing you want to have happen is your 20 buck stash of tea to go bad. If you refuse the canister, make sure you explain that it won’t match your tea-room decor. You must not mention zip-lock.

While buying the tea, the education began. The little label they put on the back tells you what temperature to make the water, how much tea to use, and how long to steep it. I’m not sure it makes much difference, what temperature and all, but it makes you feel smart, and for a second I believed that I might be in possession of knowledge that would make me better than the rest of the citizenry.

I brought home a 50/50 mixture of Samurai Chai Mate & White Ayurvedic Chai. The wife was impressed, and it was very very delicious.  As we enjoyed it, we leafed through the menu that they provided. Again, genius.

The next day, my wife already was making plans to buy Teavana tea for Christmas presents.

I’m seriously looking at starting a position in TEA.

 

 

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After the best October in a generation, I seriously doubt November will be nearly as stellar. However, there is research that shows a precedence for further gains, even after huge gains the month before. The average return of 1.44% is in line with my seasonality research.

Click on the chart to enlarge.

• $SPX data is from 1960 to 2010.
• SPY data is from 1993 to 2010

Calculations start at the open of the first trading day of the month and end on the close of the last trading day. No commissions or slippage were included.

November Statistics (using $SPX)

• Average Monthly Profit/Loss = 1.28%
• Winning Months= 63.46%
• Worst September = 1973 loss of -11.3%
• Best September = 1980 gain of +10.2%

Profit Distributions: (using $SPX)

Equity Curve: (Using $SPX)

Over the past 50 years, November has been a reliable winner.

 

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Of course after the two day rout we’ve witnessed, a bounce should not be surprising. It is comforting to see evidence for it in the short-term breadth indicators.

Two of my favorite breadth indicators are above.

The red line is the number of stocks trading above their 5 day moving averages. As of Tuesday’s close, that number was 281. Typically, less than 600 is bullish.

The green line is a Decliners indicator. This indicator looks back one year and ranks today’s number of declining stocks against previous days. A reading above 80 is good, but today’s reading of almost 93 is even better.

I added the blue lines to illustrate what has happened recently when the indicators are in sync. They do perform well in high-volatility environments.

I find that almost every recent post has had to have a news caveat due to the European debt shenanigans, and this post will not be any different. While the technicals are set for a bounce, the market has been terribly news driven, and any big news may overwhelm the technicals.

 

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