From Jason Goepfert via the virtual pen of Steve Sjuggerud and archives of Investment U and comes several VIX-related ideas that are worth mulling over 1 ½ years after they were published.
Goepfert, who heads up Sundial Capital Research and sentimenTrader.com, attempted to reconstruct what historical VIX data might have looked like if it were possible to simulate VIX readings all the way back to 1900. In this manner he developed what he calls a Faux-VIX that looks back over a century. As described by Sjuggerud, Goepfert determined that while current VIX readings look quite low by the historical standards that cover two decades of official CBOE VIX/VXO data, looking back to 1900 with the Faux-VIX, it appears that volatility readings below the current 11 level happen approximately one third of the time.
Further, and consistent with the initial post in this blog, Goepfert concluded that sustained periods of high volatility tend to alternate with lengthy periods of low volatility in cycles which average approximately five years. Much to my surprise, Goepfert then concludes that “buying the first large spike in volatility has paid off time and time again.” This contrasts sharply with my current thinking, which favors capitalizing on the mean-reverting tendencies of the VIX by fading large volatility spikes.
In future commentary, I will examine the degree and duration of various types of volatility spikes and return to Goepfert and the fade-or-buy-the-spike debate.