The VIX Signaled The Bounce Again

Last week we talked about how the probablities were in favor of a bounce based on a variety of conditions.  If there is one condition that has been an absolute slam dunk for opportunity over the last few years, it has been the VIX.  Since the end of 2012, when the buy-the-dip market started, following the levels of the VIX has been great for timing purchases during market weakness.

We ran a simple study going back to December 2012 and looked at returns in the SPY going out from 5 to 50 days.  You can clearly see that buying weakness in the market on an elevated VIX reading has been a profitable trade.  We even looked at what happened if you filtered out instances where the VIX stayed above 20 over a period of several days (VIX>20 Filtered) and there was still an appreciable edge. 

We always enjoy reading the work of Ryan Detrick and he recently ran a study on backwardation that complimented our own findings. 

 

At some point we will have an extended down move that will leave the VIX elevated for a prolonged period of time.  Yet since the end of 2012 this one simple indicator has been extremely accurate and provided a huge edge if you had followed it.