Thanks for the article. What he is basically saying is to be a contrarian and use VIX as the measure of fear/greed in the market. I can live with that. My only problem is that as stated:
The VIX has only approached 50 twice in the graph above, and the first time, at the post-9/11 market lows, flagged a perfect long entry point for an excellent bear market rally. If you went long the S&P 500 on the day of the September 20th, 2001 VIX spike to 49, you could have earned a 16.3% return by selling at the VIX bottom of 19 on March 27th, 2002.
Time warping back to March 22nd, 2001, the VIX approached 40, not quite our ideal 50 target, but this still would have been a tradable rally since it was indeed a characteristic VIX extreme volatility spike similar to others seen in recent years. While not as crystal clear as the 50-ish monsters, the lesser 40 spikes are also tradable. You could have made 10.7% going long on the VIX 40 and selling at the next VIX trough, 20 on July 2nd, 2001.
So basically either you get to have two trades in a decade, or you will have to make the indicator more unreliable so you can make a living. If it works for you, all the power to you. I find other indicators to be much more reliable than VIX.
ST |
