Interpreting A Possible Volatility Regime Change
Cam Hui | Apr 21, 2014 12:11AM ET
The job of a good market strategist is to use both Waiting for a Santa Claus rally ) and came to a similar conclusion as McIntyre. However, a possible change in vol regimes raised some concerns of the "buy when VIX-VXV falls below 0.92" rule. I backtested a simple trading rule based on the VIX-VXV ratio for the last five years. The buy rule is based on the following two conditions:
- The VIX-VXV ratio falling below 0.92; and
- It had inverted, ratio more than 1, in the recent past.
The results of the backtest are charted below. The black line shows the VIX-VXV ratio, the red line the SPX and the vertical lines are the signals generated by the system. I then classified the signals as being successful (blue vertical line) if the market was higher one month after the signal, while the unsuccessful signals were in red and flat returns colored in black.
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