Schaeffer's Trading Floor Blog

By the Numbers: The VIX 'Life Cross'

The VIX's 50-day moving average recently toppled its 200-day cohort

by 7/3/2013 7:27 AM
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Ever hear of the S&P 500 Index (SPX) Death Cross? It sounds like a band that plays a set between Anthrax and Metallica at the Sonisphere Festival, but it's a technical pattern with a scary-sounding name. It refers to when a shorter-term moving average moves below a longer-term moving average (MA). Most commonly, it refers to the 50-day MA moving below the 200-day MA. That's said to portend a bear market, though results may vary.

Since the CBOE Volatility Index (VIX) moves more or less in opposition to the market, does it make any sense to look for the inverse? That is, should we take note when the 50-day MA moves above the 200-day? I bring this up because as our own Ryan Detrick just pointed out the other day, the VIX 50-day MA crossed above the 200-day MA.

Now, before we get into some numbers, I wanted to throw out a couple of disclaimers. I focus way more on shorter-term VIX trends than longer ones. In the short term, it mean reverts, so to the extent VIX tells us much, it's when it gets stretched from a shorter-term MA. At least, that's my humble opinion.

But that's not to say we can't get some interesting info from looking at longer-term MAs. VIX tends to move in long-term "Up" and "Down" regimes. Perhaps this is a good signal of a regime change.

I looked at data back to January 1993, the birth of the SPDR S&P 500 ETF Trust (NYSEARCA:SPY). I looked at SPY returns one month, three months and six months after VIX "Life Crosses" (50-day crossing above the 200-day). In order to not double-count observations, I considered only instances that didn't overlap from a previous one.

I also looked at returns if you bought on the day of the cross and sold on the day after the 50-day crossed back under.

And the results are… pretty unremarkable.

There were 21 VIX "Life Crosses," almost exactly one per year. The duration of the crosses averaged 98.5 trading days, or about 4.5 months. They varied quite a bit, though. The shortest was literally one day: March 1, 2000. The longest lasted for 300 trading days (about 14.5 months!), starting on Dec. 16, 1996.

The market averaged a gain of 3.4% while the 50-day sat over the 200-day, which sounds like pretty normal behavior for any random 4.5-month period over the last 20.5 years. The market was higher in 14 of 21 observations, with the largest gains occurring in that 300-day "up" VIX trend that started in late 1996. The SPY rallied a remarkable 44.44% over that stretch.

I wouldn't read too much into that, though. The VIX also had a 282-trading-day stretch of "Life" that began on March 29, 2007. SPY lost 1.06% over that period. The fact that that number is so low is impressive in and of itself, considering it encompasses some massive moves in 2007 and early 2008.

So, we can safely say that the "Life Cross" we just saw doesn't portend much going forward in this particular system. How about the more rigid time frames?

Well, one month out is really nothing. There were 19 instances (remember, overlaps are eliminated). The market rallied 10 times, but the average return was -.0074%. Three months out, we averaged a 1.26% gain, with 11 wins in 18 instances.

The six-month returns actually look good, albeit in a small sample size. There were 15 instances, and six months later, SPY was higher 11 times. The average gain was 4.46%. And that's despite one massive loser: a 32% drop following the Cross of Sept. 17, 2008. Which leads me to remind everyone that 2008 was an incredible outlier that tends to wreak havoc when it's incorporated into data. Of course, backing out 2008 numbers isn't correct either (we can't pick and choose), but it's worth noting.

(Very) long story short, I don't believe this "Life Cross" is much of an indicator. It feels modestly bullish out in time, but always remember that randomly buying and holding for half a year is a reasonable strategy over most eras anyway.

Disclaimer: The views represented on this blog are those of the individual author only, and do not necessarily represent the views of Schaeffer's Investment Research.

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