Daily Commentary - Posted on Friday, February 5, 2010, 12:16 AM GMT +1

10 Comments


Feb Friday 5

VIX surges 20% as fear returns …

Major markets sold off today, with the VIX (CBOE Volatility Index) up more than 20%. From a historical and statistical perspective, when the VIX surged 20% or more on a single session in the past, the market regularly turned around the then following session recovering at least a part of it’s previous session’s losses.

Table I below shows the SPY‘ historical performance (since 01/01/1990) over the course of the then following five sessions after the VIX surged 20% or more on a single session in the past.

Interesting to note that since 1991 (32 occurrences) the SPY never lost more than -0.51% on the close of the then following session (the exception of the rule was the year 1990), and closed higher on 27 out of 37 occurrences (thereof higher on the last 10 occurrences) on the then following session. With a historical Profit Factor of 5.13 and Distribution of Returns at 70% (the median trade shows a significantly higher rate of return / positive magnitude of change than the median trade (=50%) within the at-any-time distribution of returns), odds are heavily lopsided in favor of a positive outcome (means a higher close) on Friday’s session.

Successful trading,
Frank

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Disclaimer: No position in the securities mentioned in this post at time of writing.

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Comments (10)

 

  1. Predatorsetup says:

    Hi Frank,

    tomorrow is BLS day and today ES1 closed down, in a previous post you highlighted the short term trend following of this setup…how would you choose the main pattern? today´s post or the previous one?

    Thanks in advance,

    Predator

    • Predatorsetup,

      thanks for pointing this out.

      If two contradictory setups are triggered (like the short-term mean reversion VIX > +20% and a trend-following pre-BLS release down move), the market model -if in doubt- would regularly take the short side of the market (due to the fact that not ALL necessary buy setups are triggered), but there are some setups (like the VIX > +20% setup) which have absolutley priority, or the otherway around: historically especially the odds (going again a positive profit factor of >+5, and no potential gain > +0.51% on the short side out of the last 32 occurrences) would -under no circumstances- favor taking a short position.

      Best,
      Frank

  2. […] While catching up on my nightly reading I noticed the following post by Frank of Trading the Odds: http://www.tradingtheodds.com/2010/02/vix-surges-20-as-fear-returns/  In this post, Frank presents his […]

  3. […] VIX surges 20% as fear returns … – TRADING THE ODDS __________________ The real secret of stock market success still remains (and probably will remain) locked up in the bosoms of a few who are too busy to write, and too rich to feel the need of writing Henry Howard Harper: The Psychology of Speculation http://opinionidalmondo.investireoggi.it/ […]

  4. Bill says:

    Hi Frank,

    What prompted you too remain shot today, looking at the huge recovery we had from intraday low didn’t it change you inclination to go long.

    thanks for your work

    Bill

    • Bill,

      why ‘remain’ SHORT today (Friday’s position was LONG) ?

      A recovery day regularly does not show a positive follow-through on the then following day. When the SPY posted an intraday low at least -1.75% below the previous session’s low (Friday’s low was -1.7475%) but closed positive on the day, the SPY closed lower next day on 28, but higher on only 13 out of a total of 41 occurrences since 1990 (w/ median trade of -0.79%). Out of those 41 occurrences, the SPY posted at least one lower close than the trigger day’s close (Friday’s close) on 39 out of 41 occurrences (95.12%) occurrences, significantly higher than the at-any-time probability of 71.44% for at least one lower close over the course of the then following five sessions.

      So sellers will probably take the upper hand again eventually during the next week.

      Best,
      Frank

  5. CarlosR says:

    Frank,

    Congratulations on another great call regarding the last hour!

    That was so spot-on that it was almost spooky… I noticed the ES futures started rising about 1 minute into that last hour. Doesn’t get any better than that!

    Thanks for all your hard work.

  6. […] catching up on my nightly reading I noticed the following post by Frank of Trading the Odds: http://www.tradingtheodds.com/2010/02/vix-surges-20-as-fear-returns/  In this post, Frank presents his standard approach to measuring the edge of a given setup. He […]

  7. […] Trading the Odds – VIX Surge Bounce Odds […]

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