As we sit in the pre-FOMC doldrums contemplating how Ben Bernanke will handle his historic post-meeting press conference and wondering whether we can properly label the next VIX move to 17 or 18 a ‘spike,’ this seems like a good time to review some of the elements of VIX spikes and other measures of VIX extremes.
Better yet, point your browser to the My Simple Quant blog and more specifically to a post from last Thursday, More on VIX and Bollinger Bands, in which the resident author Chris has presented the results of his analysis of what happens to the VIX and SPY in the week following those instance in which the VIX closes below its lower Bollinger band two days in a row.
A couple of comments are in order on the analysis at My Simple Quant. First, the results should not surprise long-time readers here, but for those who are prone to not click through, there is always something to be learned in the details. I have discussed at some length how one can use simple and exponential averages, moving average envelopes, Bollinger bands and other similar mechanisms to measure how far the VIX has strayed from various assessments of a historical range.
An important point to consider – and one not stressed by My Simple Quant – is that the VIX is generally a better market timing mechanism when it spikes up than when it prints extreme lows. Perhaps a better way of thinking of this phenomenon is that while an extremely high VIX can rarely cause investors to rethink where an appropriate range should be for volatility, an extremely low VIX can sometimes be a self-reinforcing mechanism and signal a move to a new lower volatility regime.
- VIX Punches Through Upper Bollinger Band
- Short-Term and Long-Term Implications of the 30% VIX Spike
- VIX Spike of 35% in Four Days Is Short-Term Buy Signal
- Combining Bollinger Bands and Rates of Change in the VIX
- VIX Spikes Above Bollinger Bands
- The VIX and Bollinger Bands
- The Trading Markets 5% VIX Rule
- Charting the VIX with 10 Day SMA Envelopes
- VIX Kitchen Sink Chart