Yesterday’s market rout sent the Volatility Index (VIX) up 20.7% in a single day. Trading the Odds shows how, historically, a 20%+ VIX move has signaled that the market is short-term oversold.
Since 1990, buying right after a 20%+ VIX surge has made money over the following five trading days, as shown below. So prepare for the bounce:
Trading the Odds: Interesting to note that since 1991 (32 occurrences) the SPY never lost more than -0.51% on the close of the then following session (the exception of the rule was the year 1990), and closed higher on 27 out of 37 occurrences (thereof higher on the last 10 occurrences) on the then following session. With a historical Profit Factor of 5.13 and Distribution of Returns at 70% (the median trade shows a significantly higher rate of return / positive magnitude of change than the median trade (=50%) within the at-any-time distribution of returns), odds are heavily lopsided in favour of a positive outcome (means a higher close) on Friday’s session.