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VIX TRADING RULES And Other Good Info

|Includes:SPDR S&P 500 Trust ETF (SPY), SVXY, UPRO, XIV

First some stats and other random thoughts that I think are useful. After looking at the 2013 data I found the following:

Average price of the VIX when we hit a market pullback - 12.36.

Average market bottom for VIX - 17.82.

All decent pullbacks came after 8 or more trading days VIX closing in the 12's (except for artificial pullback - Debt ceiling/government shutdown - they don't count). We hit day 7 on Friday 1/10/14. The longest time staying in the 12's area was 12 days but both of those were early last year. As the year moved on we stayed low on the VIX for less time in the cycle.

Last 3 VIX cycles VIX in the 12's before market pullback - 9 Days, 8 Days and 10 Days. Market was very complacent on Friday 1/10/14. Between the low VIX and the jobs number I saw red and sold everything. 100% cash. Good timing after looking at Mondays pullback.

Last year had 7 VIX cycles top to bottom.

If VIX is in the 11's even intraday - sell. You are picking up pennies in front of a train. It could work out but why take that chance?

If VIX rises to 15 - Sell. During QE it has always gone higher when rising to 15.

If you buy (NYSEARCA:SVXY) while VIX is in backwardation you have a high chance of buying close to or at the bottom. The longest VIX stayed in backwardation in 2013 was 3 days. This is not the case outside of QE and since we have had no decent pullbacks since 2011 - be wary of Summer 2011 case where it went back and forth out of backwardation before plunging 70% in a month.

(NASDAQ:XIV) (SVXY) vs (NYSEARCA:UPRO) same VIX cycle top and bottom dates. IE - you bought and sold XIV and UPRO as a pair. XIV outperformed UPRO by a mile 6 out of 7 cycles.
Bigger risk = bigger rewards

XIV drawdowns - -9.2% -20.5% -21.9% -23.9% -19.0% -21.5% -6.6%

UPRO drawdowns- -6.2% -8.1% -8.9% -16.3% -12.4% -11.2% -2.9%

XIV Pops - 17.0% 33.0% 19.8% 59.1% 24.3% 46.2% 13.4%

UPRO Pops - 7.3% 22.0% 26.6% 27.9% 17.8% 29.3% 9.7%

PULLBACKS SINCE 2004 (Courtesy of Stephen Aniston)

Drawdown SPY

Vix Rise

Avg
Duration

Avg XIV Drawdown

#

         

5%

7.43

24

-23.15

6

         

7%

8.29

28

-22.69

8

         

10%

10.2

57

-31.97

3

         

20%

31.21

78

-62.94

2

         

50%

64.56

351

-86.56

1

Click to enlarge

The take away is during QE buying when you see a 5% pullback is a good bet and buying when you see a 7% pullback is a great bet. Outside of QE buying 10% pullback is good, buying 20% pullback is great and if you see a 50% pullback - sell everything you own and go triple long the market! :)

Here are the rules I have hanging above my desk. I read them every chance I get to remind myself not to fall into some of the common investment traps. It especially helps on days when I am 100% cash and the market is soaring higher.

VIX TRADING RULES:

  1. BE PATIENT! You can catch the next train.
  2. DATA DEPENDANT. Let the VIX signals make the decisions for you
  3. DON'T OVER THINK IT. Stick with the plan, don't chase returns
  4. KNOW YOUR GOAL. Always remember where you want to go
  5. DON'T GET GREEDY. Don't extend past the signals…they limit your risk.
  6. COMPOUNDING IS MY FRIEND! Even the small gains add up
  7. MINIMIZE THE CHANCE OF LOSSES Play the cycles and historical macro events only

That last one I have ignored more than once and paid for it. New Years resolution 2014 - I am going to take my own advice from now on LOL!

Next post I plan to do a 2013 scorecard showing how I did and how I could have done using the VIX Cycle method 100% of the time.

Later I plan to do a more detailed article on 2012 and 2013 VIX Cycles and what to expect for 2014. Also, a more detailed article on Market Pullbacks since 2004 and how to time entries into and out of stocks for all market types.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: 100% cash as of 1/10/14

Stocks: SPY, SVXY, XIV, UPRO