Could We See a VIX Rerun?

As soon as the VIX-mentum washed upon our shores, it vanished. Yes, we can officially close the books on our latest overbought CBOE Volatility Index (VIX). All that's left to do is add up those returns in "X" months. We are back to DEFCON 1. That is, VIX closed Friday beneath its 10-day simple moving average, which means -- alas -- we have an update!

It took us eight trading days and an awful lot of Greek and China news, but we're now in summer relaxation mode! If you bought on the VIX alarm, you earned 0.98%, which is (sort of) coincidentally the median return if you followed this strategy every time the "Overbought VIX" buzzer went off. The average duration of the play is 5.52 days, so I took the liberty of calculating the mean and median returns of randomly buying and holding for six trading days since July 2009. And your average win was 0.36%, slightly higher than the average win during "VIX On" of 0.31%.

The difference is not statistically significant. If you prefer medians -- and you probably should in this case -- you do outperform, 0.98% to 0.52%. The trade has "won" two-thirds of the time.

Another semi-interesting footnote is that the SPDR S&P 500 ETF (SPY) bottomed (so far) six days after VIX hit overbought. That's close to being in line with the average time frame of 4.57 trading days. This stat is somewhat subjective, as it's only a "local" bottom. If SPY takes out the lows in the next week or so, I'll adjust that date. I won't adjust if it takes place later, or VIX gets overbought again this week. In that case, I'll consider it a new occurrence.

And that brings up an interesting point. VIX hit overbought on July 17 last year after a nearly six-month quiet stretch ... and then it got overbought again two weeks later. This latest VIX alarm went off at an almost identical time frame. So, will we see a rerun -- i.e., another VIX blast this week? Anything is possible. I mean, we're still quite jittery and, all things considered, it wasn't exactly an upside explosion on Friday, given the good news.

On the other hand, this summer's VIX blast carried on longer than last year's -- eight days vs. one. My guess would be that if we get a second wave down, it won't happen quite as closely in time as it did last year. Then again, I didn't think we'd see this kind of volatility around a long holiday weekend in a seasonally terrible time of year for vol. ... so what do I know?

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research