Monday, April 30, 2012

Why Friday's VIX/SPX Action Could Be Short-Term Bearish

A couple of months ago (Feb 27th blog) I showed the study below. It looks at instances of SPX and VIX both closing positive on a Friday. The VIX has a tendency to move opposite the SPX, so when they move in the same direction, it can often suggest an edge over the next few days. Due to calendar effects the VIX has a natural tendency to sink on Friday afternoons as we approach the weekend. So seeing the SPX and VIX both rise is less common on Fridays than any other day of the week. This is why I use Friday as a filter.

 Note that I also included a long-term trend filter. And even in an uptrend the numbers here suggest a short-term downside edge. That edge primarily plays out over the first three days. Below is an equity curve showing how the edge has evolved assuming that 3-day holding period.

 The edge has persisted for some time and the curve is again hitting new lows. This acts as confirmation of the stats table.

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