VIX Spikes Above Bollinger Bands
Waiting for the buy-on-the-dip mentality to return.
Yesterday's 12% jump in the VIX lifted the volatility index to 13.8% above its 10-day simple moving average. As noted on a number of occasions here, when the VIX is at least 10% above its 10-day SMA, this is usually a good time to initiate a short-term mean reversion play and go long the SPX and/or short the VIX.
While I have not discussed it as often in this space, another useful VIX mean-reversion signal can be derived from using Bollinger bands to determine when the VIX is overextended and likely to snap back. The simplest approach is to monitor when the VIX closes above the upper band of a 20-day, two standard deviation lookback period.
The chart below uses the standard 20-day, two standard deviation Bollinger bands to evaluate the moves in the VIX during the past year.
Click to enlarge
Note that following the largest sustained VIX spike ever -- during September and October of last year -- it's been relatively rare for the VIX to close above the upper band. There was one instance of a close well-above the upper band in January that marked a short-term bullish move, then there were two closes above the upper band at the end of February and the beginning of March that preceded the market bottom and strong bounce.
By historical standards, yesterday's close 4.7% above the upper band is a fairly substantial breach and suggests a short-term bullish bias. Given the narrowing Bollinger band width (bottom study), however, it obviously took a much smaller move to penetrate the upper band than it did in January, when the VIX was hovering around 50.
It seems as if lately, everyone has been looking for a pullback. The big question is how much of a pullback it will take to satisfy the bears and how soon it will be until the buy-on-the-dip mentality begins to dominate again.
For related posts on Bill Luby's blog, try:
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Daily Recap Newsletter