Will 2015 Turn Into 2008?

Overbought readings on the CBOE Volatility Index (VIX) are becoming more frequent

Adam Warner
Jan 12, 2015 at 9:37 AM
facebook twitter linkedin


Another week, another overbought CBOE Volatility Index (VIX) -- and another (brief) end to an overbought VIX.

Here's an update to the table I run when this happens. If you're new to the show, here's how it works: I count VIX as officially "overbought" when it closes 20% or more above its 10-day simple moving average. I then see how the SPDR S&P 500 ETF Trust (SPY) does going forward from that point over one-month and three-month time frames, and also how it does from the overbought VIX close to the next VIX close under the 10-day (with the duration of that hold, measured in trading days). I include random one-month and three-month performance figures as a frame of reference.

Oh, and I am running this one day early -- we don't actually hit one- and three-month thresholds until today, so this will change slightly next time I run it (click chart to enlarge):

Overbought VIX 2009-2015

It remains a generally good strategy to go long when VIX gets overbought. I'd suggest, though, that it usually pays to go long a couple days after the first violation, as the common pattern is that the market gets a bit more oversold first before the buyers step in. What I find most interesting is that these overbought VIXes are getting more and more frequent. So, it got me to thinking: Is this a sign of the "End of Low VIX World?" Kind of an unrest before the longer-term calm goes away?

Well, there's no way to know. But here's how this same table looks if I use data from 2003-2007 (click chart to enlarge):

Overbought VIX 2003-2007

It's five years vs. six, but VIX pops are a bit more common this go-around. And they did, in fact, become more frequent in 2007 -- so there are some shades of today, which doesn't bode too well. The relative results were not as strong in the 2003-2007 period, though that's almost all because of that ugly play from Oct. 19, 2007. (That was the 20th anniversary of the 1987 crash, by the way.)

I doubt that 2015 turns into 2008. But the increased volatility of volatility is something we need to keep on the radar.

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


A Schaeffer's exclusive!

The Expert's Guide

Access your FREE trading earnings guide for Q3 before it's too late!


  
 

Partnercenter