VXO Is Suggesting An Immediate Pullback - Or None At All

Thursday we again saw the VIX and VXO close well below their recent mean.  Such stretches suggest a collapse in fear among investors.  The study below was last seen in the 10/21/13 subscriber letter. It looks for stretches of 15% or more that have persisted for three days.

Based on the stats table there appears to be a downside inclination. I find the note at the bottom of the study to be especially interesting. Nearly every case has experienced an almost immediate pullback, but those that didn't went without pulling back for a long time.

Recent Employment Day Tendencies

The employment report is due to be released Friday morning.  News there could certainly send the market in either direction.  But anxiety about the employment report has largely been unfounded over the last year and a half.  The table below was published in Wednesday night’s subscriber letter.  It looks at how the VIX, XIV and SPX have all performed on employment days since 7/1/12.

These 17 instances have shown a strong propensity for the VIX to drop, and XIV and SPX to rally.  We’ll see how it works out today, but the recent tendency has been bullish on employment days.

VIX Closes Up For The 7th Day In A Row While SPY Is In An Uptrend

One notable bit of action is that Wednesday marked the 7th day in a row that the VIX has risen.  That is a very unusual streak.  I decided to look back at all other times the VIX had risen for 7 days in a row while SPY was above its 200ma.  Below are results of SPY assuming a 3-day holding period.

Instances are low, but so far the returns are overwhelmingly bullish.  Very little drawdown compared to both the run-up and the average trade.  This appears to be worth some consideration.

Another VIX Study With A Short-Term Warning

The VIX most often will trade opposite SPX.  But Tuesday it rose along with it.  That’s not too unusual for one day, but the same thing also happened Monday.  This triggered the study below which was last seen in the 5/16/13 subscriber letter.  I discussed the results in some detail in last night’s letter, and have shown the profit curve below assuming a 1-day holding period.

Overall the results appear to suggest a moderate downside edge for Wednesday.

Uh-Oh, Low VXO (Revisted)

Both the VIX and VXO (which is the old calculation for the VIX) closed well below their 10-day average for the 3rd day in a row on Friday.  This action in VXO triggered a study that I last discussed here on the blog on January 7, 2013.  The January instance followed the fiscal cliff deal at the end of last year, which was similar to the recent shutdown/debt ceiling debate. The study looks for stretches of 15% or more below the 10ma that have persisted for three days.

Based on the stats table there appears to be a downside inclination. I find the note at the bottom of the study to be especially interesting. Nearly every case has experienced an almost immediate pullback, but those that didn't went without pulling back for a long time.

VIX Spikes To New Highs

It is notable that the VIX spiked up 16% on Monday and closed at the highest level since June.  In the past when it has closed at a high level on a strong move there has been a tendency for the SPX to bounce over the next few days. This can be seen in the study below from the 5/15/12 blog.  (Stats are updated.)

The numbers appear compelling. Below is a profit curve using a 2-day hold.

This study has been persistently bullish for a long time and certainly appears worth consideration.

When VIX Rises On Monday As SPX Hits A Short-Term High

I am seeing a mix of short-term evidence at the moment.  Having not shown anything bearish lately, I decided to share the study below, which triggered at the close on Monday and hints of a downside edge.  It looks at times during long-term uptrends that the VIX closes up on the first day of the week while the SPX is closing at a 10-day high.  Most of the time the VIX and SPX will trade in opposite directions. The VIX has a natural tendency to fall on Fridays and rise on Mondays.  Due to this, Monday is the most common day of the week to see VIX rise in conjunction with SPX.  This study appeared in the Quantifinder yesterday afternoon, and I have updated all stats below.

Results here certainly appear to suggest a day or two of weakness.

Of course Wednesday is a Fed Day, which brings about additional considerations.  Ahead of this, traders may want to review many of the Quantifiable Edges Fed Day edges using the Fed Study label.  Or for a more complete collection of Fed Day studies, check out The Quantifiable Edges Guide to Fed Days.

When VXO is Stretched to the Downside

One index providing interesting readings is VXO (the old VIX calculation).  On Monday it closed a little more than 15% below its 10ma.  And it may do that again today.  At one time, such rapid drops in the VXO were often followed by a move lower in the SPX.  But this has not been as consistent in recent years.  Below is a study I showed in last night’s Subscriber Letter.

Stats here seem to suggest a bit of a downside inclination.  But the equity curve tells a little bit of a different story.

The downside edge seemed apparent for the 1st 60 instances or so.  But the last 25, all of which occurred over the last 3 years since June 2010, have been extremely choppy and shown no progress.  For whatever reason the market seems to have changed, and traders should be aware of that.

When SPX & VIX Both Rise For The 2nd Consecutive Day

I am looking at a mix of bullish and bearish studies right now.  One indicator arguing for the bears is the VIX.  The VIX is a measure of volatility and it typically moves counter to the SPX.  So it will most often rise when the SPX moves down and it will drop when SPX rallies.  Yesterday both the SPX and the VIX closed higher.  And they did so for the 2nd day in a row.  The study below is an old one that looks at other times this has occurred and the market is in a long-term uptrend.  All results are updated.

While not overwhelming, the numbers here provide the bears some hope over the next 1-2 days.

What Follows Huge 1-Day VIX Spikes

Monday saw some unusually strong action.  One index that showed a real extreme move was the VIX.  It spiked up 34% as fear struck options traders.  In the past I have shown how 1-day spikes of 20% or greater have generally suggested an upside edge.  I’ve rerun that study tonight.  I did also look at moves of greater than 25% and 30%, but that did little to change the odds and just made instances fewer.  So I simply stuck with the old 20% parameter for the study below.

Next day stats suggest a solid upside tendency.  I would also note that the size of both the “Avg Winning” and “Avg Losing” trading is quite large for a 1-day move.  So regardless of whether the market moves higher or lower, we could see some strong action today.

A Deeper Look At An Old Study Related To Friday's VIX Action

Even with the SPX rising on Friday, the VIX managed to close up a bit. The VIX will typically trade in a direction opposite the SPX, so it is unusual that they both close higher. On Fridays, the VIX has a natural tendency to dip in the afternoon, so it is most unusual to see them both close higher on Friday. In the 12/3/12 blog I showed a stats table that suggested a decent downside edge based on this action.  It examined instances of the VIX and SPX both closing higher on a Friday while the SPX is in an uptrending market. Rather than update those odds with just the 1 extra instance, I have provided below a picture of a profit curve.  I don’t often show profit curves on the blog, but almost always share them in the Subscriber Letter.

Considering the fact that the study utilizes a long-term uptrend filter, the persistent downslope is quite impressive. The last instance once again put the equity curve at new lows.

Heads-Up Investing pointed out this study and a few others on his blog over the weekend.

Traders should keep in mind that the above study represents just one bit of influence that could impact the market over the next few days.  There are always crosswinds.  And while the weight of the evidence that I am seeing is pointing towards a short-term dip, strong momentum and liquidity could continue to push the market higher.

Why the Persistently Low VXO is an Uh-Oh

Both the VIX and VXO (which is the old calculation for the VIX) closed well below their 10-day average for the 3rd day in a row on Friday.  This action in VXO triggered a study that I last discussed here on the blog on July 5, 2011 (though I have discussed it in the subscriber letter a few times since).  It looks for stretches of 15% or more below the 10ma that persist for 3 days.

Based on the stats table there appears to be a downside inclination. I find the note at the bottom of the study to be especially interesting. Nearly every case has experienced an almost immediate pullback, but those that didn't went without pulling back for a long time.

What 100-day Highs In The VIX Could Imply For The Short-Term

The VIX is often referred to as the fear index.  When VIX levels are relatively high, that often suggests fear and uncertainty among market participants.  Relative highs can be measured a number of ways.  Often I will show VIX levels compared to short-term moving averages.  But an interesting study from yesterday's Quantifinder looked at 100-day VIX highs that occurred when the SPX was not making 100-day lows.  In other words, relatively extreme fear in a market that is not making long-term lows.  The study was last seen in the 3/16/11 Subscriber Letter (click here for a free trial). I have updated it below.

The stats seem to suggest a bullish edge that persists for at least three weeks. Much of that edge is realized over the first 1-7 days.

And not only has this setup been followed by bullish inclinations over the time frames shown here, but it has also been a compelling overnight setup.  For details on the overnight implications check out today’s post on Overnight Edges.

Lastly, I also noticed this morning that Woodshedder posted a study based on the short-term VIX action last night which also appears to suggest a bullish edge.

What Friday's VIX Actions Hints At (Revisited)

Even with the SPX rising on Friday, the VIX managed to close up a bit. The VIX will typically trade in a direction opposite the SPX, so it is unusual that they both close higher. On Fridays, the VIX has a natural tendency to dip in the afternoon, so it is most unusual to see them both close higher on Friday. The study below was last seen a few months ago in 9/17/12 blog. It examines other instances of the VIX and SPX both closing higher on a Friday while the SPX is in an uptrending market. All stats are updated.

As you can see, there appears to be a decent downside edge suggested by this study. That edge primarily plays out over the first three days.

What Yesterday's VIX Action Hints At For Today

Somewhat unusual about the rise in the SPX Monday was that it was accompanied by a rise in the VIX as well.  Most of the time they mirror each other.  One quirk with the VIX is that it has a tendency to fall on Fridays and rise on Mondays. Therefore this setup is more common on Mondays than any other day of the week. The table below examines performance on Tuesdays after this has occurred.

I only show 1-day results here because anything longer shows no inclination.  And while the edge here isn’t terribly strong, it is interesting that the VIX’s inclination to rise on Mondays does not seem to completely eliminate the tendency for the SPX to pull back the next day.  Of course if this setup happens on a Friday, then the downside edge is more pronounced.

What Friday's VIX Action Hints At

Even with the SPX rising Friday, the VIX managed to close up a bit. The VIX will typically trade in a direction opposite the SPX, so it is unusual that they both close higher. On Fridays, the VIX has a natural tendency to dip in the afternoon, so it is most unusual to see them both close higher on Friday. The study below was last seen in 4/30/12 subscriber letter. It examines other instances of the VIX and SPX both closing higher on a Friday while the SPX is in an uptrending market. All stats are updated.

As you can see, there appears to be a decent downside edge suggested by this study. That edge has primarily played out over the first three days.

A Strong Move To A New High In The VIX

The VIX closed at its highest level since January on Monday. In the past when it has closed at a high level on a strong move there has been a tendency for the SPX to bounce over the next 1-2 days. This can be seen in the study below.

The numbers appear compelling. Below is a profit curve using a 2-day hold.

Not quite as compelling with the recent fade, but perhaps still worth taking into consideration.

Of course this does not change yesterday’s observation that market conditions are abnormal and risks are elevated.

What Friday's VIX Action Hinted At

The study below 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 in the below test.

Note that I also included a long-term trend filter. And even in an uptrend the numbers here suggest a short-term downside edge.

When VIX Rises and SPX Closes at a 50-day High

There were a few studies related to VIX action that appeared in the Quantifinder yesterday afternoon. This particular study looks at large mid-week rises in the VIX during times the SPX is closing at a 50-day high. All results are updated.

New readers may wonder why I use a day-of-week filter with this study. The VIX has a natural tendency to fall on Fridays and rise on Mondays. Because of this I typically separate out those days from the rest of the week when conducting VIX-based studies. Implications of the rising VIX and 50-day SPX high appear to be moderately bearish over the next few days, suggesting a pullback.

The Incredible Shrinking VXO

The VXO has dropped very strongly over the last week and a half. On Thursday for the 2nd day in a row it closed more than 20% below its 10ma. Looking back to 1986 I was only able to find 3 other instances where this occurred. While it’s dangerous to draw solid conclusions from just 3 instances I decided to show them below:

It hasn’t happened in about 21 years, which makes the setup even more questionable, but the run-up / drawdown stats were so lopsided I thought it was worth pointing out. Over the next 2 days the instances all saw a drawdown between 2.1% - 3.8%. Only 1 instance saw any run-up, and it was just 1.6%. (We’ll be testing that at the open.)