And That VIX Spike

• Posted by Adam Warner
• on October 29th, 2009

Pretty extreme VIX move out of the blue the past week. And it bodes quite well for the short term market, as Bill Luby notes.

Today the VIX closed at 27.91, which is up 34.9% in the four trading days since Thursday’s close of 20.69. Over the course of the 20 year history of the VIX, the volatility index has posted close-to-close four day gains of 35% on 42 occasions. If you strip out the consecutive instances of +35% days, this leaves 27 instances in which the VIX crossed above +35% in four days. I have reproduced the full table of these 27 instances below for several reasons. First, the key takeaway is that from a timing perspective, a long SPX position entered after a 35% spike will generally perform best over the course of a five day time horizon. In the graphic below, the 27 instances average a five day gain of 1.99% vs. a typical five day SPX return of 0.14%, for a 1.85% net differential. While the net differential peaks at five days, it is apparent in just one day and persists for at least fifty trading days.

He had this out last night, and certainly the 1-day call looks good out of the gate. Important to note that this is a short term call, farther out you can get all “2008″ with this and find a couple disasters if you bought on a spiked VIX.

Again though, I think we had a bit of a tone change as this was the first VIX spike in the bull move that got met with an even greater bull spike. So while we did get way overdone here (and in the McClellan everyone’s yapping about now) we have to consider that rallies are for fading again.

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