In case you missed it, the VIX spiked 35% in four days, then shed about half the run up yesterday. Option markets are clearly looking a bit confused. Today we’re up slightly.
Yet VIX And More believes that the 35% four-day move through Wednesday was a buy signal.
Over the last 20 years, the VIX has only been up 35% 27 times. On average, the five day gain for the S&P500 following these 25 instances has been +1.99%. Even on a 10, 20, or 50 day horizons the returns have been positive.
VIX and More: In particular, this contrarian long strategy did an excellent job of timing the bounces off of the lows during the Asian financial crisis in 1997, the Russian financial crisis and Long-Term Capital Management crisis in 1998, the 9/11 World Trade centre attacks in 2001, as well as the technology bottom following the WorldCom bankruptcy filing in 2002.
In contrast to the excellent market timing above, it should also come as no surprise that the four long signals from September and October 2008 turned out to be disasters in the 20-100 day time frame. Over the course of a 3-10 day time horizon, however, these were excellent short-term trading opportunities from the long side. I do wish to point out, however, that if one strips out the last four rows of the tables, suddenly the 100 day time frame has a return of 6.86%, which is 2 ½ times that of the baseline (“census”) return. The obvious conclusion is that the VIX spike buy signal is quite reliable for the short-term, but not as reliable for over longer time frames.
While this isn’t our style of trading, we find the historical perspective and VIX-contrarian conclusion useful. Just remember that while history argues in favour of a market phenomenon, it’s no guarantee. The table below was compiled by VIX and More, their full post has more explanation.