I put a significant amount of $$$ long on the S&P when the VIX touches 50, then double it at every 5 point increment upward. I then close it out at 35. It's a shame the setup only comes about once a year.
If you check the a long term chart of the VIX (going back to its creation by the CBOE) you'll see it's only risen above 50 on six distinct occasions. A rise above 50 has always been followed by a sharp market recovery. I'm not going to go through the trouble of giving returns because I'm not relying entirely on history when giving attention to this fact. It is my belief that a high VIX, especially when above 50, is a symptom of a dislocation in the risk market, specifically the cost of hedging a basket of large cap stocks. The market has a tendency to sharply correct these types of dislocations.
Here's my logic: The VIX got incredibly low prior to this recent sell off. Look at a 5 year chart, and you'll see it touched the lower Bollinger Band, which is something that only happened twice before. Also, there was talk of the VIX becoming irrelevant back when it was in the low 20's for all those weeks. An extreme amount of complaceny at the top will lead to an extreme amount of fear at the bottom. Also, look how tight those Bollinger Bands got when it was in the low 20's. It was setting up for a big explosive move (look how tight they got before the crash of '98). I think we're headed for a similar move. At a minimum, the VIX will go back to 50-55, maybe a little higher.
Focusing on VIX now may not be reliable. 1. We're used to viewing its extremes either in bull market interruptions or PRESUMED bull market interruptions. Its bear market parameters may be much higher. 2. All the attention it has received. Old was street saw, "what everybody knows isn't worth knowing". 3. Even at other "bull market interruption" extremes (50+), nearly all the OTHER sentiment indicators were at extremes in concert. This time, it's virtually the VIX alone. To me, that mean's something's wrong/different and the VIX reading is not to be trusted. Should VIX spike up to 60, 80, AND the other sentiment indicators be at their usual extremes, perhaps then it will mean what the Powers and the Media have been telling us what to think about it (and how they want us to react to it). So far, the acceptance of what VIX >50 means could be a suckerfish trap!
What bollinger band period and SD? You have to define your parameters so we know what you are talking about.
ok lets see: Rydex Bull/Bear ratio is cooperating Large fund outflows is cooperating Sentiment reading from AAII is cooperating Newsletter Bull/Bear ratio is cooperating what else do you need to point to fear in the market ?!?
1. I don't use the Rydex bull/Bear ratio, so can't have a view. 2. "Large" fund outflows? Taken to mean, ANY outflow = capitulation? Amount of outflow doesn't seem "large" to me. 3. AAII is sort of cooperating (and not at equivalent extreme), but it's also among the most volatile. Hell, they could be 50% bulls again by next week. 4. Newsletters, again only so so. And we've viewed THEM through bull market parameters, too. I was thinking of the AAII and Newsletters and seeing them as only so so. More importantly, the VXN and QQV were only at mid-range for even bull parameters. Not much fear there. Also, the BPI series. They were only so so as well. Then, there's the COT. Commercials net shorts have been increasing during the decline while small specs longs have been increasing. When at extremes, like now, better to bet on the Big money commercials, don't you think? My conclusion is that most are only mid-range to slightly below. Not the full fledged "buy of the century... always works, never fails" headlines of the WSJ + 5X per day on the financial news shows. That's all.
Don't have the source but outflows were around $40 billion (appx the same as Sept 11 last year) Not chump change. AAII, is fully cooperating. For a graph depicting its movements pick up IBD. You'll see it is acting exactly as it did last Sept. In any case, I'm not trying to convince you of anything! We are all adults here and can make up our own minds.
Quit taking IBD years ago. I'll take your word for it on AAII. And though I don't weight it heavily in my considerations, you could put that in the "plus" camp. Score now "VIX and friends" = 2, "Other sentiment indicators not at extremes" = well, lets say several more. As for outflows.... $40B out of a $9.5T equity market = 0.5% redemptions. Maybe big dollars historically, but hardly a market mover of influence. When 5-10% of the market's money outflows, then it's time to consider "capitulation". That's my adult view, and I'm still suspicious of all the attention given to the uncharacteristically divergent behavior of the VIX! (Sure would be nice for the markets to take out the lows next week. I'd feel better about it all at least.)