There was a fair amount of news today about $VIX closing beneath 16. The last time it closed at this level was July 8th, 2011. Today also marked a new 197 day low for $VIX. Let’s look at what happens next after $VIX makes a new X day low.
The Rules:
Buy SPY at the close if
- $VIX makes new X day low
Sell the position at the close Y days later. No commissions or slippage included. All SPY history used.
The Results:
As new X day $VIX lows increase, so does the depth of the pullback that seems to inevitably occur over the next week.
Similarly, the greater the new X day low, the greater performance is punished going forward. The sweet spot seems to reside somewhere between a new 50 and 100 day low.
Today’s current value, a 197 day new $VIX low, yields the poorest performance.
The white Buy-n-Hold line was generated by separating SPY performance into 50 day segments and then averaging those segments.
Thoughts and Caveats:
All runs had enough samples for results to be generalized.
I’m not sure whether I want to make any predictions from these results. Volatility could easily continue to fall, or even flatline. My gut says it won’t, and that a market pullback of a week or so will result in $VIX rising from its ashes.
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