Tuesday, December 21, 2010

Vix and S&P 500 Close Two Up Straight Days in December

The VIX and S&P 500 (SPX) each rose today, making it two days in a row for this event. Since these two index's usually move inversely to each other, some people may find it a little odd. And when odd things occur, I start wondering what it means. This happened on 10/26/10 and I noted it back then in a blog post, running a study on the action of the SPX for the next month. The study revealed that there was a downside bias the first 9 trading days after the event, then it switched to a positive bias the remaining 11 days. The bottom line was that the study didn't blow me away, but it did provide some insight as to where prices might go.

Here is what happened to the S&P 500 in October 2010 after it rose 2 straight days along with the VIX:


MAE = largest unrealized trade loss
MFE = largest unrealized trade gain

This is somewhat in line with historical results; nothing too profound.

I won't glean too much from these results, but now I'm wondering if a seasonality bias has any effect. It's December and people say don't bet against Santa, especially because he knows magic and has flying reindeer.


















So what happens to the S&P 500 after it rises, along with the VIX, two straight days in December only?

It has happened only 7 times since 1990, but check this out:


When VIX and S&P 500 both rise 2 consecutive days, buy S&P 500 on close in DECEMBER ONLY; sell 'n' days later. $100,000 per trade; 1990 to present.
Exit n
 days
Net Profit
# Trades
# of Winners
% of Winners
Max. Trade % DD
Avg % P/L
W. Avg. Profit
L. Avg. Loss
Profit Factor
Payoff Ratio
1
    (2,644.04)
7
3
42.86
-1.43
-0.38
      293.94
     (881.46)
0.25
0.33
2
    (3,421.40)
7
3
42.86
-2.52
-0.49
      481.83
  (1,216.73)
0.30
0.40
3
    (7,632.12)
7
2
28.57
-4.75
-1.09
  1,034.22
  (1,940.11)
0.21
0.53
4
 (11,225.64)
7
2
28.57
-4.75
-1.60
      987.62
  (2,640.18)
0.15
0.37
5
 (10,675.25)
7
3
42.86
-4.75
-1.53
      862.19
  (3,315.45)
0.20
0.26
6
 (12,681.20)
7
2
28.57
-5.74
-1.81
      803.48
  (2,857.63)
0.11
0.28
7
    (9,943.71)
7
2
28.57
-5.74
-1.42
      985.94
  (2,383.12)
0.17
0.41
8
 (15,540.39)
7
1
14.29
-7.18
-2.22
      836.39
  (2,729.46)
0.05
0.31
9
 (13,481.02)
7
1
14.29
-7.18
-1.93
  1,672.78
  (2,525.63)
0.11
0.66
10
    (9,370.77)
7
3
42.86
-7.18
-1.34
  1,364.10
  (3,365.76)
0.30
0.41
11
    (7,594.29)
7
4
57.14
-7.18
-1.08
  1,168.91
  (4,089.97)
0.38
0.29
12
    (4,153.98)
7
3
42.86
-7.18
-0.59
  1,308.57
  (2,019.92)
0.49
0.65
13
    (4,200.53)
7
4
57.14
-7.79
-0.60
  1,281.40
  (3,108.71)
0.55
0.41
14
    (6,155.22)
7
4
57.14
-8.31
-0.88
  1,089.17
  (3,503.96)
0.41
0.31
15
 (11,462.26)
7
2
28.57
-10.98
-1.64
  1,625.66
  (2,942.72)
0.22
0.55
16
 (11,075.49)
7
3
42.86
-11.52
-1.58
  1,805.45
  (4,122.96)
0.33
0.44
17
 (11,099.31)
7
4
57.14
-12.50
-1.59
  1,289.56
  (5,419.19)
0.32
0.24
18
 (10,273.38)
7
5
71.43
-12.50
-1.47
      894.04
  (7,371.78)
0.30
0.12
19
 (10,014.36)
7
3
42.86
-12.50
-1.43
  1,547.81
  (3,664.45)
0.32
0.42
20
 (15,146.89)
7
3
42.86
-12.50
-2.16
  1,244.48
  (4,720.08)
0.20
0.26


It appears that this December complacency does not end well.

Aside from this study, I been trying to unscientifically monitor the sentiment of StockTwits. About a week and a half ago, the smart money (Suggested Stream) was warning about complacency, a low VIX, poor breadth and other negative divergences. Now this week, I'm not seeing that as much. I feel like they've jumped back on the bull train. The attitude seems like "ah screw it. Don't fight Santa. We're going up up up." That kind of worries me. I agree that it's not all out shorting time, but some caution and nimbleness would be wise. But heck, what do I know? We're probably melting up through the end of the year, but after that look out.

Good trading everyone.

3 comments:

Anonymous said...

The StockTwits Suggested Stream is a pathetic joke. How do you get on that list? Go out drinking with Howard, that's it. Everyone that I checked on that list was saying that the April/May 2009 rally was a bear market rally and even as it kept rolling on they never admitted they were wrong. So yeah, the only thing that stream is good for is contrarian trading, fade it!

Chris said...

Dude. I was just making an observation. I'm not bashing it and I don't think it's pathetic. I'm not trying to get on it either, but if I was, I'd show up to Howard's front door with a 12 pack and some bean dip. Why not?
I can't even comment about anything before Sept 2010 because I didn't know about StockTwits. To each is own, but I like and respect the folks at ST. You gotta take it for what it is. Make your own decisions.

Mike said...

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