Wednesday, March 23, 2011

When The VIX Moves From Overbought to Oversold in a Week

The sharp drop in the market and then subsequent sharp rebound was accompanied by strong VIX movements in the opposite directions. Moving from a position where the VIX is stretched above the 10ma to one where it is stretched below the 10ma in a short period of time is quite rare. It is something I last showed on the blog on 10/9/09. I have updated that study below.

Results over the first 2-3 days are somewhat sketchy, but once you get out beyond that they become more consistent and more powerful. Since it is commonly thought that VIX stretches below the 10ma of this magnitude suggest short-term bearish inclinations for the SPX, many people may find these results surprising. This study from 2008 demonstrates that a low VIX does NOT suggest a bearish edge. And the market conditions that create this situation (SPX posts a strong rebound from a sharp decline during a long-term uptrend) don’t scream downside edge either.

1 comment:

jgpietsch said...

Thanks for Quantifying this Rob, important work. My best, Jeff