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A Trigger Event In The Vix Asset Allocation Model 8/31/15

Nothing discussed herein will be news to anyone who has been following my frequently long discussions about this Model since October 2008, when I first started to publicly publish blogs. My first public discussion was in several posts published in November 2008:

Stocks, Bonds & Politics: Trading and Asset Allocation in Stable and Unstable VIX Pattern (11/29/2008)

Stocks, Bonds & Politics: More on VIX AND ASSET ALLOCATION (11/26/2008)

Further Discussion of Volatility and Asset Allocation (11/21/2008)

Stocks, Bonds & Politics: FALL BELOW 776.76: Stable and Unstable VIX Patterns Impacting Changes in Allocation to Stocks, Bonds and Cash (11/20/2008)

The St. Louis Fed has an interactive VIX chart that allows the investor to easily move the cursors to focus on specific time frames:

CBOE VIX Volatility Index-St. Louis Fed

++++++

This post assumes familiarity with the mechanical Model based on history. Vix Asset Allocation Model - South Gent | Seeking Alpha

This post will be divided into several sections.

I will first describe the Trigger Event and what it means.

I will then discuss what has happened after the prior Trigger Events that will give the reader a flavor of what may happen now. I emphasized the word "may" for a reason.

The TE event has meant in the past that a far more dangerous market will probably arise in the near future. The increased whipsaw movements in the VIX and other volatility indexes in the past have resulted in a roller coaster ride in stocks that end up going nowhere after several years with one shorter duration one discussed below.

The odds of a catastrophic event increase during those periods. The catastrophic event might be a crash similar to the one experienced in October 1987 or to a decline of more than 45% in the S & P 500 ("SPX"), which is defined as a catastrophic event. Others may simply refer to that event as blood flowing in the streets, quoting the 18th century British nobleman Baron Rothschild (""Buy when there's blood in the streets, even if the blood is your own." and there will be some of your blood there) A relatively mild 20% decline in the SPX followed the October 1989/January 1990 TE and a Stable Vix Pattern in that case resumed shortly after one year.

A Trigger Event has occurred in my Vix Asset Allocation Mode:

Aug 31, 2015 28.43
Aug 28, 2015 26.05
Aug 27, 2015 26.10
Aug 26, 2015 30.32
Aug 25, 2015 36.02
Aug 24, 2015 40.74
Aug 21, 2015 28.03

This first jump was typical for a TE event. The close on 8/20 was at 19.14 and at 15.25 and 13.79 the previous two days.

The Trigger Event ("TE") terminates the Stable VIX Pattern that started in September 2012. The TE is the start of the Unstable Vix Pattern.

I would anticipate a stampede out of stock funds during a TE period, which has already started to happen. Investors redeemed a record $29.5 billion for the week ending last Wednesday.

I have been discussing for a week or so the likelihood of a Trigger Event in that model. (my comments to Update On Portfolio Management And Positioning As Of 8/18/15 - South Gent | Seeking Alpha)

I am going to drag, drop and edit some of my comments to that post here.

The essence of the Unstable Vix Pattern ("UVP") is that there will be temporary movements below 20 throughout that period which can last for years. The Model does not predict how long the Unstable Vix Pattern will last.

The temporary movements below 20 during the UVP will be associated with a rising stock market, but that movement is not a buying event. It is a stock selling event that may be coupled with the purchase of hedges to cushion the blow from the next decline. Trading Strategy Vix Asset Allocation Model Part 2: Hedging In An Unstable Vix Pattern - South Gent | Seeking Alpha

Eventually, a movement below 20 will come around where the VIX remains below 20 for 3 months that terminates the Unstable Pattern. The subsequent Stable Vix Pattern is when all of the money in the SPX has been made historically, using the volatility data posted by the CBOE, which starts on 1/1/1986 for the S & P 100 ("VXO") and 1/2/1990 for SPX ("VIX")

VXO Interactive Stock Chart; VXO Micro Site

VIX Interactive Stock Chart

For as long as the UVP lasts, the market is not going to hold onto its rally and will reverse with a spike up in the VIX and a decline in the stock market averages. The buyer below 20 during that Unstable VIX Pattern will continuously be whipsawed into unrealized losses on those positions until it stops.

Since the model is based on history, it may not work in the future unless future events resemble the past, and there is a certain rhythm in historical stock market cycles. The Model was first tested in real time during August 2007 and thereafter.

The Model is best used with at least one other indicator such as a signal based on criteria linked to the SPX 200 SMA line. I use the VIX Model as a guide, as I have said many times in the past.

The Trigger Event signal for me needs to be coupled with a decline 5% below the break in SPX 200 day SMA line. This second requirement was met when the SPX spiraled down to 1867 last week. The break in the 200 day SMA line was around 2080 which occurred shortly before the most recent meltdown starting on 8/21/15. S & P 500 Interactive Stock Chart A 5%+ break below 2080 would be a decline below 1976 which occurred on 8/21/2015. The next important break for me would be below the one year closing low at 1862. That chart also reveals a death cross where the 50 day SMA line crosses below the 200 day line, though it is just by a tad as of last Friday (50 SMA at 2074.53 vs. 200 day at 2075.41) and slightly more today (2071.77 vs. 2075.08)

I would make the following general observations. It is important first to become acquainted with the clear terms of the Model if anyone is interested in it. Then, I would use it as a guide along with other indicators including the long tested historical valuations measures used to evaluate stocks and indexes.

With the advent to a Unstable Vix Pattern, and you know your in one when it starts to roll, a different trading strategy needs to be implemented than the one prevailing during the Stable Vix Pattern.

One of the main benefits derived from the Stable VIX Pattern is simply to stay with the stocks, with nips and tucks based on standard valuation criteria and other fundamental factors. It is important just to shut off the talking heads and the noise. Historically, all of the money has been made in the SPX during those periods. This is not to say that it will be all fun and games. The stock market is not going to go up in a straight line.

For the Trigger Event aftermath, the Model is silent on how to respond. Each investor needs to make their own decision. The disruption in the Stable VIX Pattern with the Trigger Event is a warning. How you respond to that warning depends on a variety of factors including your own situational risks and tolerance for instability and potential losses.

The TE does make this kind of statement: No matter what you may think, something fundamental has changed in the market for the worse.

A more volatile and dangerous period most likely lies ahead.

Historically, those periods have had one or more really bad things happen including a crash (e.g. October 1987) or a catastrophic stock market decline (e.g. 2000-2002 & 2008-March 2009). The best bad thing was a 20% decline in 1990 followed a relatively quick recovery.

Those types of bad events are not required, but are simply rendered more likely by the whipsaw and high volatility numbers characteristic of an Unstable Vix Pattern. Possibly, unlike the past, the market will just snap out of it relatively quickly.

I doubt that whatever causes the Trigger Event is easily and quickly ameliorated or cured. And, it is conceivable that the market may just be mistaken, in which case the VIX will return quickly to a Stable VIX Pattern. Until that actually happens, I would be in my Unstable Vix Pattern playbook and the Stable VIX Pattern book will not be followed until the Model mechanically flashes its existence.

The August 2007 Trigger Event, and the subsequent Confirmation Events that followed shortly thereafter in November, January and March, was clearly tied to the popping of the debt and housing bubble, the considerable rot that existed in the underwriting standards for loans, and the inevitable implosion resulting to firms owning that crap in large quantities or who had to buyback what they had sold to others. When a firm is leveraged at 40%, it does not take much of decline in asset values to wipe out its equity.

Humans do not react well, and are never comfortable with the kind of instability prevailing during high volatility periods as evidenced by a whipsaw movement in the VIX.

The whipsaw VIX pattern does not appeal to the human psyche. That pattern is marked by movement between 20 and 30 or higher, with spurts back down to below 20 that are only temporary, followed by another elevated burst to high VIX levels, with the possibility that one of those bursts will reach skyward in a catastrophic event. That is a highly predictable pattern in what I call Phase 1, Unstable Vix Pattern.

So, at a minimum, the Trigger Event requires the investor to seriously evaluate their current stock allocation and their situational risks.

My response to what was happening in 2007 was to increase my cash allocation to over 30%, to create a material "A" or better short term bond ladder, and to adopt a trading strategy for the Unstable Vix Pattern.

I had already started to sell stock mutual funds and ETFs before that event based on a bevy of stories about massive subprime home loan defaults which had started in January and February 2007. This was not some hard to understand problem that was hidden from view. The problem was smacking me in the face almost daily, saying wake up Dude, a long time before the meltdown occurred starting in mid-2008.

By taking those proactive measures, which turned out to be insufficient, I recovered quickly by then redeploying available cash to start buying in late February 2009 when it become probable that the world's financial system would survive based on extraordinary measures undertaken by governments and central banks worldwide. Those buys are documented in the blog with the first foray back into stocks funded by selling the A or better rated bonds in February.

Unlike the prior Trigger Events, this last one was a spike going directly from low VIX readings to high volatility readings with nothing in between.

Bespoke Investments pointed out that market has not had this kind of selloff in 75 years. As noted in this Bloomberg Business article published on 8/26, Bespoke was referring to the SPX closing 4 standard deviations below its 50 day SMA for the third consecutive sessio (8/21, 8/24 and 8/25). I am not willing to call that a simply nervous breakdown that is made okay by taking a pill once a day.

August 2007 Trigger Event:

Prior to the August 2007 TE, there were 10 VIX readings between 20 and 26. Then, the TE happened as shown by this numbers:

Aug 20, 2007 29.87 29.95 25.80 26.33 0 26.33
Aug 17, 2007 25.25 31.46 25.23 29.99 0 29.99
Aug 16, 2007 32.68 37.50 30.44 30.83 0 30.83
Aug 15, 2007 28.22 31.76 26.16 30.67 0 30.67
Aug 14, 2007 25.56 28.29 25.31 27.68 0 27.68
Aug 13, 2007 28.02 28.02 25.48 26.57 0 26.57
Aug 10, 2007 28.04 29.84 26.91 28.30 0 28.30
Aug 9, 2007 24.46 26.90 23.84 26.48 0 26.48

Moving from left to right, this box shows the open, high, low, close and adjusted close which will be the same as the close for the VIX.

This was obviously a valid signal. There were no closes over 40 and 35, which occurred during the August 2015 Trigger Event.

After the August 2007 Trigger Event, the S & P 500 started to rally and the VIX returned to below 20 on 9/21/2007:

Recovery Event: Sell Signal after Trigger Event

Sep 21, 2007 19.00
Sep 24, 2007 19.37
Sep 25, 2007 18.60
Sep 26, 2007 17.63
Sep 27, 2007 17.00
Sep 28, 2007 18.00
Oct 1, 2007 17.84
Oct 2, 2007 18.49
Oct 3, 2007 18.80
Oct 4, 2007 18.44
Oct 5, 2007 16.91
Oct 8, 2007 17.46
Oct 9, 2007 16.12
Oct 10, 2007 16.67
Oct 11, 2007 18.88
Oct 12, 2007 17.73
Oct 15, 2007 19.25
Oct 16, 2007 20.02
Oct 17, 2007 18.54
Oct 18, 2007 18.50

VIX Historical Prices

This is the corresponding S & P 500 closes that could be directionally predicted by the aforementioned VIX movements:

S & P 500 Closes

8/8/2007 1497.49
Trigger Event Period: 8/9/2007 through 8/21/2007
Closing Low During Trigger Event 1406.7 on 8/15/2007
Closing High Thereafter 1562.47 10/10/2007

The VIX then started to close in the low 20s with three more closes below 20 at 19.87, 19.56 and 18.53 and then the first Confirmation Event occurred when the VIX jumped from 21.39 to 26.49 (11/7/07)

1st Confirmation Event of an Unstable Vix Pattern
Nov 7, 2007 26.49
Nov 8, 2007 26.16
Nov 9, 2007 28.50
Nov 12, 2007 31.09
Nov 13, 2007 24.10
Nov 14, 2007 25.94
Nov 15, 2007 28.06
Nov 16, 2007 25.49
Nov 19, 2007 26.01
Nov 20, 2007 24.88
Nov 21, 2007 26.84
Nov 23, 2007 25.96
Nov 26, 2007 28.91
Nov 27, 2007 26.28

Something very fundamental had changed in the market. This confirmation event occurred almost three months after the TE. The next two confirmation events would occur much quicker:

Feb 12, 2008 26.33
Feb 11, 2008 27.60
Feb 8, 2008 28.01
Feb 7, 2008 27.66
Feb 6, 2008 28.97
Feb 5, 2008 28.24
Feb 4, 2008 25.99
Feb 1, 2008 24.02
Jan 31, 2008 26.20
Jan 30, 2008 27.62
Jan 29, 2008 27.32
Jan 28, 2008 27.78
Jan 25, 2008 29.08
Jan 24, 2008 27.78
Jan 23, 2008 29.02
Jan 22, 2008 31.01
Jan 18, 2008 27.18

Jan 17, 2008 28.46

I would emphasize the time duration of the foregoing VIX numbers, their elevation, the shorter recovery period and the shorter time between VIX bursts compared to the prior series starting in August 2007.

The next burst occurred with no recovery period and started about a month after the last one.

Mar 26, 2008 26.08

Mar 25, 2008 25.72
Mar 24, 2008 25.73
Mar 20, 2008 26.62
Mar 19, 2008 29.84
Mar 18, 2008 25.79
Mar 17, 2008 32.24
Mar 14, 2008 31.16
Mar 13, 2008 27.29
Mar 12, 2008 27.22
Mar 11, 2008 26.36
Mar 10, 2008 29.38
Mar 7, 2008 27.49
Mar 6, 2008 27.55
Mar 5, 2008 24.60
Mar 4, 2008 25.52
Mar 3, 2008 26.28
Feb 29, 2008 26.54

1997 Trigger Event:

The epicenter of the 1997 event was in Asia, same as now.

The October/November 1997 Trigger Event, the longest so far, was proceeded by elevated numbers mostly ranging in the 20 to 25 range until there was a snap on Monday 10/27/1997. The VIX closed that day at 31.12, up from 23.17 the prior Friday. The VIX then had 16 consecutive closes over 30 and 20 closes between 25 to 30 before the TE started to end in late November.

Dec 30, 1997 24.38
Dec 29, 1997 26.79
Dec 26, 1997 29.27
Dec 24, 1997 30.27
Dec 23, 1997 29.86
Dec 22, 1997 28.56
Dec 19, 1997 29.18
Dec 18, 1997 27.19
Dec 17, 1997 26.33
Dec 16, 1997 26.11
Dec 15, 1997 27.37
Dec 12, 1997 27.92
Dec 11, 1997 27.63
Dec 10, 1997 24.55
Dec 9, 1997 23.36
Dec 8, 1997 23.22
Dec 5, 1997 22.65
Dec 4, 1997 23.84
Dec 3, 1997 23.92
Dec 2, 1997 25.66
Dec 1, 1997 26.01
Nov 28, 1997 27.43
Nov 26, 1997 28.95
Nov 25, 1997 28.95
Nov 24, 1997 29.80
Nov 21, 1997 26.65
Nov 20, 1997 27.32
Nov 19, 1997 29.93
Nov 18, 1997 31.58
Nov 14, 1997 33.66
Nov 13, 1997 36.64
Nov 12, 1997 37.84
Nov 11, 1997 36.38
Nov 10, 1997 36.63
Nov 7, 1997 36.27
Nov 6, 1997 32.57
Nov 5, 1997 32.18
Nov 4, 1997 32.24
Nov 3, 1997 32.09
Oct 31, 1997 35.09
Oct 30, 1997 38.20
Oct 29, 1997 33.75
Oct 28, 1997 31.22
Oct 27, 1997 31.12 (look at the jump here)
Oct 24, 1997 23.17

The percentage increase from 10/24 to 10/27 is material at 34.31% and is similar to the lift-off in the most recent TE (19.34 to 28.03 or 44.93%). The VIX's movement can be turbo charged in the first leap up.

{You may also see a lift-off when there is a break in the Phase 1 Unstable Vix Pattern into a probable Phase 2 catastrophic pattern A reading of 34.74 on Friday 9/27/08 was a barely consistent reading for a Phase 1 pattern and was already worrisome given the prior numbers of 35.19, 35.72, 33.85, 36.22 that was like a rumbling of a volcano just before it blows. On the next day of trading, Monday 9/29/2008, the VIX surged to a close of 46.72 or +35.44% from its prior close and then the molten lava started to spill on the population shortly thereafter. A hurricane analogy might also be appropriate, as you are hit with Category 1 or 2 winds, saying to yourself that was not so bad, just before the Category 5 winds and a tsunami of water hits}

VIX Historical Prices

S & P 500 Closes:

10/17/1997: 983.12
11/12/1997: 905.96
Down -7.85%

This is the recovery period after the October/December 1997 Trigger Event. The bulls do not give up easy.

Mar 23, 1998 19.65 20.18 19.55 19.98 0 19.98
Mar 20, 1998 17.61 18.84 17.60 18.69 0 18.69
Mar 19, 1998 17.90 18.53 17.70 17.76 0 17.76
Mar 18, 1998 18.71 19.06 18.11 18.29 0 18.29
Mar 17, 1998 18.42 19.04 18.25 18.66 0 18.66
Mar 16, 1998 19.27 19.34 18.46 18.51 0 18.51
Mar 13, 1998 17.69 19.43 17.58 18.71 0 18.71
Mar 12, 1998 18.76 19.21 18.04 18.25 0 18.25
Mar 11, 1998 19.41 19.56 18.76 18.89 0 18.89
Mar 10, 1998 19.90 20.01 19.39 19.43 0 19.43
Mar 9, 1998 20.20 20.45 19.72 20.23 0 20.23
Mar 6, 1998 19.97 19.97 19.13 19.14 0 19.14
Mar 5, 1998 20.87 21.06 20.26 20.93 0 20.93
Mar 4, 1998 19.27 19.83 19.27 19.58 0 19.58
Mar 3, 1998 19.43 19.58 19.04 19.04 0 19.04
Mar 2, 1998 18.97 19.38 18.80 19.19 0 19.19
Feb 27, 1998 18.66 18.94 18.39 18.55 0 18.55
Feb 26, 1998 18.96 19.02 18.53 18.63 0 18.63
Feb 25, 1998 19.01 19.29 18.39 18.62 0 18.62
Feb 24, 1998 19.13 19.69 18.77 19.35 0 19.35
Feb 23, 1998 19.14 19.72 18.97 18.99 0 18.99
Feb 20, 1998 19.56 19.87 18.97 19.00 0 19.00
Feb 19, 1998 19.89 20.19 19.72 19.88 0 19.88
Feb 18, 1998 20.24 20.38 19.66 19.66 0 19.66
Feb 17, 1998 20.43 21.00 20.23 20.76 0 20.76
Feb 13, 1998 20.48 20.52 19.73 19.84 0 19.84
Feb 12, 1998 20.62 21.22 19.66 19.73 0 19.73
Feb 11, 1998 21.04 21.04 20.36 20.38

This is a table with corresponding SPX prices:

Mar 23, 1998 1,099.16 1,101.16 1,094.25 1,095.55 631,350,000 1,095.55
Mar 20, 1998 1,089.74 1,101.04 1,089.39 1,099.16 717,310,000 1,099.16
Mar 19, 1998 1,085.52 1,089.74 1,084.30 1,089.74 598,240,000 1,089.74
Mar 18, 1998 1,080.45 1,085.52 1,077.77 1,085.52 632,690,000 1,085.52
Mar 17, 1998 1,079.27 1,080.52 1,073.29 1,080.45 680,960,000 1,080.45
Mar 16, 1998 1,068.61 1,079.46 1,068.61 1,079.27 548,980,000 1,079.27
Mar 13, 1998 1,069.92 1,075.86 1,066.57 1,068.61 597,800,000 1,068.61
Mar 12, 1998 1,068.47 1,071.87 1,063.54 1,069.92 594,940,000 1,069.92
Mar 11, 1998 1,064.25 1,069.18 1,064.22 1,068.47 655,260,000 1,068.47
Mar 10, 1998 1,052.31 1,064.59 1,052.31 1,064.25 631,920,000 1,064.25
Mar 9, 1998 1,055.69 1,058.55 1,050.02 1,052.31 624,700,000 1,052.31
Mar 6, 1998 1,035.05 1,055.69 1,035.05 1,055.69 665,500,000 1,055.69
Mar 5, 1998 1,047.33 1,047.33 1,030.87 1,035.05 648,270,000 1,035.05
Mar 4, 1998 1,052.02 1,052.02 1,042.74 1,047.33 644,280,000 1,047.33
Mar 3, 1998 1,047.70 1,052.02 1,043.41 1,052.02 612,360,000 1,052.02
Mar 2, 1998 1,049.34 1,053.98 1,044.70 1,047.70 591,470,000 1,047.70
Feb 27, 1998 1,048.67 1,051.66 1,044.40 1,049.34 574,480,000 1,049.34
Feb 26, 1998 1,042.90 1,048.68 1,039.85 1,048.67 646,280,000 1,048.67
Feb 25, 1998 1,030.56 1,045.79 1,030.56 1,042.90 611,350,000 1,042.90
Feb 24, 1998 1,038.14 1,038.73 1,028.89 1,030.56 589,880,000 1,030.56
Feb 23, 1998 1,034.21 1,038.68 1,031.76 1,038.14 550,730,000 1,038.14
Feb 20, 1998 1,028.28 1,034.21 1,022.69 1,034.21 594,300,000 1,034.21
Feb 19, 1998 1,032.08 1,032.93 1,026.62 1,028.28 581,820,000 1,028.28
Feb 18, 1998 1,022.76 1,032.08 1,021.70 1,032.08 606,000,000 1,032.08
Feb 17, 1998 1,020.09 1,028.02 1,020.09 1,022.76 605,890,000 1,022.76
Feb 13, 1998 1,024.14 1,024.14 1,017.71 1,020.09 531,940,000 1,020.09
Feb 12, 1998 1,020.01 1,026.30 1,008.55 1,024.14 611,480,000 1,024.14
Feb 11, 1998 1,019.01 1,020.71 1,016.38 1,020.01 599,300,000 1,020.01

S & P 500 Historical Prices

So by February 1998, or about 3 months after the TE's end, the SPX is higher than before the TE. The perception would be among many that everything was just fine.

This Trigger Event ushered in an Unstable Vix Pattern that was not terminated until 2003. One characteristic of the Unstable Vix Pattern has been a lot of up and down chop going nowhere after a period of years.

By 2002, an investor could have bought the SPX back at a lower level than prevailing prior to the TE or in February-April 1998. (e.g. 776.76 on 10/9/2002: Historical Prices | S&P 500)

And, I would note that the SPX was below 700 in March 2009 or 11 years after the 1,000+ closes in February 2008.

1987 Trigger Event:

A Trigger Event occurred prior to the 1987 stock market crash. That TE was proceeded by an extended movement in volatility between 20-25 that did not occur in the most recent TE which went directly up to 28 from a Stable Vix Pattern number.

I have to use VXO data here since there is no VIX data from the CBOE:

May 20, 1987 26.09 27.34 25.76 26.19 0 26.19
May 19, 1987 25.23 27.14 24.76 26.57 0 26.57
May 18, 1987 25.65 26.23 24.67 25.37 0 25.37
May 15, 1987 26.06 26.25 24.47 25.06 0 25.06
May 14, 1987 26.31 26.46 24.92 25.11 0 25.11
May 13, 1987 27.05 27.75 26.20 26.33 0 26.33
May 12, 1987 27.11 28.03 26.60 26.96 0 26.96
May 11, 1987 25.47 27.28 24.89 27.02 0 27.02
May 8, 1987 26.23 26.68 25.04 25.27 0 25.27
May 7, 1987 26.26 26.85 24.93 25.45 0 25.45
May 6, 1987 26.12 26.64 25.46 25.66 0 25.66
May 5, 1987 27.18 27.69 25.27 25.68 0 25.68
May 4, 1987 27.94 28.13 27.09 27.18 0 27.18
May 1, 1987 29.13 29.38 27.44 28.22 0 28.22
Apr 30, 1987 29.03 29.03 27.63 28.45 0 28.45
Apr 29, 1987 31.47 32.57 28.85 29.22 0 29.22
Apr 28, 1987 32.14 32.68 31.14 31.20 0 31.20
Apr 27, 1987 28.92 31.84 28.92 31.46 0 31.46
Apr 24, 1987 29.01 30.67 28.90 30.23 0 30.23
Apr 23, 1987 28.73 29.96 28.64 29.13 0 29.13
Apr 22, 1987 27.47 28.96 27.31 27.95 0 27.95
Apr 21, 1987 27.76 28.44 26.54 27.22 0 27.22
Apr 20, 1987 27.60 27.91 26.80 27.18 0 27.18
Apr 16, 1987 27.49 27.79 26.14 27.48 0 27.48
Apr 15, 1987 29.35 29.35 27.03 27.59 0 27.59
Apr 14, 1987 25.90 30.49 25.66 28.97 0 28.97
Apr 13, 1987 27.30 27.55 25.77 26.01 0 26.01
Apr 10, 1987 25.10 30.11 25.10 26.39 0 26.39
Apr 9, 1987 25.41 27.45 25.18 26.06 0 26.06

Recovery Period: The Bulls Do Not Give Up Easy

Aug 11, 1987 17.84 21.39 17.76 20.91 0 20.91
Aug 10, 1987 17.26 17.59 16.82 17.09 0 17.09
Aug 7, 1987 17.64 17.83 17.11 17.30 0 17.30
Aug 6, 1987 17.75 17.97 17.05 17.05 0 17.05
Aug 5, 1987 17.83 18.10 17.19 17.67 0 17.67
Aug 4, 1987 17.84 18.80 17.63 18.09 0 18.09
Aug 3, 1987 17.40 17.68 16.62 17.45 0 17.45
Jul 31, 1987 16.62 17.25 16.29 16.45 0 16.45
Jul 30, 1987 15.93 16.70 15.69 16.40 0 16.40
Jul 29, 1987 16.66 16.77 15.53 15.91 0 15.91
Jul 28, 1987 16.44 17.12 15.93 15.95 0 15.95
Jul 27, 1987 17.37 17.59 16.42 16.61 0 16.61
Jul 24, 1987 17.43 17.92 17.12 17.12 0 17.12
Jul 23, 1987 17.96 18.63 17.31 17.31 0 17.31
Jul 22, 1987 17.58 18.31 17.30 17.73 0 17.73
Jul 21, 1987 17.41 17.62 16.72 17.43 0 17.43
Jul 20, 1987 17.08 17.15 16.52 16.75 0 16.75
Jul 17, 1987 16.73 17.16 16.25 16.65 0 16.65
Jul 16, 1987 17.55 17.92 16.78 17.10 0 17.10
Jul 15, 1987 17.79 18.10 16.90 17.51 0 17.51
Jul 14, 1987 18.19 18.35 16.64 17.10 0 17.10
Jul 13, 1987 17.88 19.05 17.78 17.78 0 17.78
Jul 10, 1987 19.06 19.24 17.71 17.76 0 17.76
Jul 9, 1987 19.53 19.89 18.73 19.28 0 19.28
Jul 8, 1987 19.82 20.35 19.24 19.30 0 19.30
Jul 7, 1987 20.69 20.98 19.72 19.85 0 19.85
Jul 6, 1987 20.51 21.23 20.04 20.60 0 20.60

And then the Crash:

Nov 25, 1987 37.91 37.96 35.91 36.30 0 36.30
Nov 24, 1987 39.92 40.29 37.79 38.11 0 38.11
Nov 23, 1987 45.74 46.59 43.28 43.37 0 43.37
Nov 20, 1987 52.27 53.43 47.14 47.62 0 47.62
Nov 19, 1987 45.04 52.14 45.04 49.50 0 49.50
Nov 18, 1987 50.26 50.93 45.26 46.53 0 46.53
Nov 17, 1987 50.20 50.97 47.82 49.59 0 49.59
Nov 16, 1987 46.06 49.31 45.36 46.50 0 46.50
Nov 13, 1987 49.12 50.60 47.47 47.59 0 47.59
Nov 12, 1987 49.84 52.75 48.92 49.21 0 49.21
Nov 11, 1987 52.74 56.22 51.85 55.55 0 55.55
Nov 10, 1987 57.76 58.28 53.66 54.76 0 54.76
Nov 9, 1987 57.69 59.49 53.07 54.73 0 54.73
Nov 6, 1987 53.27 57.14 50.38 55.78 0 55.78
Nov 5, 1987 62.89 62.89 53.45 53.54 0 53.54
Nov 4, 1987 60.13 63.78 57.23 58.47 0 58.47
Nov 3, 1987 57.88 65.08 55.86 58.44 0 58.44
Nov 2, 1987 63.03 63.03 54.89 54.90 0 54.90
Oct 30, 1987 58.53 62.36 55.19 61.41 0 61.41
Oct 29, 1987 77.94 77.94 58.17 64.66 0 64.66
Oct 28, 1987 103.06 103.06 78.58 81.24 0 81.24
Oct 27, 1987 101.56 106.77 93.43 97.51 0 97.51
Oct 26, 1987 105.83 116.04 104.83 113.33 0 113.33
Oct 23, 1987 97.51 102.79 85.73 98.81 0 98.81
Oct 22, 1987 54.83 116.04 54.83 102.22 0 102.22
Oct 21, 1987 138.32 138.53 73.91 73.91 0 73.91
Oct 20, 1987 171.52 172.79 138.50 140.00 0 140.00
Oct 19, 1987 71.33 152.48 62.48 150.19 0 150.19
Oct 16, 1987 28.17 39.07 27.26 36.37 0 36.37
Oct 15, 1987 26.43 29.93 26.03 27.86 0 27.86
Oct 14, 1987 25.60 27.47 24.18 26.36 0 26.36
Oct 13, 1987 24.58 25.26 23.71 24.32 0 24.32

The ability to get out at a higher price than prior to the Trigger Event will also depend on how far the market falls during one.

The VXO numbers remained elevated between October 1987 and July 2008. The shock of the 1987 crash reverberated for a long time in the volatility numbers. It was not until December 1988 that stable movement below 20 started to occur.

VXO Historical Prices

I quit using the VXO data when the VIX data series started as of 1/1/1990. The VXO did show a Stable Vix Pattern forming in early 1989, starting with a below 20 print on 11/21/1988. I am going to discuss what happened thereafter below. I had not previously studied this 1989-1990 VXO data.

A Trigger Event that results in a bear market decline (-20%+) can easily be an entirely different animal than one that causes a 7.85% decline. With a huge and prolonged spike in volatility and a 20%+ SPX decline, there could easily be no short term snapback that results in the VIX returning to sub 20 levels or the S & P 500 returning to higher levels prevailing before to the Trigger Event within a period measured in months.

VXO October 1989 Trigger Event-Confirmed January 1990:

The VXO started a Stable Pattern early in 1989 using the criteria of 3 month's of continuous movement below 20.

There was an eruption in the VXO starting in August 1990. The initial spike lasted 3 days with readings of 20.51, 22.5 and then 25.63. There was a jump to 31.77. There was then 63 days of VXO readings over 26, followed by the typical whipsaw pattern of an Unstable Vix Pattern before forming the longest Stable Vix Pattern on record. VXO Historical Prices Starting in 1991

I had previously noted the 1991-October 1997 Stable VIX Pattern in previous posts, but had mistakenly only looked at the VXO data leading up to the 1987 crash and its immediate aftermath.

Stocks, Bonds & Politics: VIX and S & P Compared 1990 to 1997 (5/20/09 Post)("Under the VIX Asset Allocation Model, as currently configured, I can see that this market is in a bear market at the start of the VIX chart. The pattern is characteristic of the Phase 1 Unstable VIX Pattern. The S & P chart starts at 361 in July 1990. By the end of 1990, it is at 321. During that period, the VIX starts at around 21, shoots up to over 33 in August, falls down to around 21 in November, and then back to 36.2 on 1/14/91.")

In that May 2009 post, I noted that the VIX was in an Unstable Vix Pattern in 1990 but did not go back pre-VIX data to check on whether there was a Stable Vix Pattern formed and whether there was TE event.

I will now delve into those issues. This kind of analysis shows the detailed historical analysis that underlies what I call a Simpleton Model.

After examining the 1989 VXO data, I concluded that a Stable VIX Pattern formed but was terminated after several months with a Trigger Event that preceded the 19% decline later in 1990.

This VXO data series prior to 1/1/90 requires IMO a slight modification in the Model's requirements for a TE.

There was a series of high readings in October 1989:

Oct 30, 1989 28.34 29.37 27.51 27.51 0 27.51
Oct 27, 1989 29.13 33.46 28.80 30.03 0 30.03
Oct 26, 1989 26.96 29.42 26.59 28.44 0 28.44
Oct 25, 1989 25.70 26.12 24.72 26.03 0 26.03
Oct 24, 1989 24.94 31.84 23.82 24.60 0 24.60
Oct 23, 1989 21.35 24.11 21.14 23.21 0 23.21
Oct 20, 1989 22.57 24.04 22.17 22.95 0 22.95
Oct 19, 1989 24.80 25.04 19.55 22.87 0 22.87
Oct 18, 1989 27.93 28.15 25.11 26.75 0 26.75
Oct 17, 1989 25.57 29.32 25.45 26.23 0 26.23
Oct 16, 1989 51.71 51.71 24.29 24.29 0 24.29
Oct 13, 1989 16.42 30.85 16.32 28.24 0 28.24

There was an insufficient number of elevated days using my prior requirements. There were 7 days over 26 with only 1 reading above 30. Then there was a quick return to below 20 movement. The CBOE does not have VIX data prior to 1/1/1990. And, importantly, knowing that the SPX is historically slightly more volatile than the S & P 100, I do not know for certain whether the foregoing period in October would qualify as TE for the VIX as presently defined. It would have been very close using the current criteria.

The lowest VXO reading after the foregoing was at 17.47 (11/17/89). The S & P 500 closed at 341.61. The movement below 20 lasted until early January 1990.

The market then demonstrated the characteristics of an Unstable Vix Pattern. After moving below 20 for a short period, there was another burst above 26 in January 1990. The first movement was into the low 20s with readings of 21.7, 22.3, 21.04, 22.3, 21.04, and then 26.03:

Jan 31, 1990 28.06 28.58 25.98 25.99 0 25.99
Jan 30, 1990 28.97 30.75 27.80 28.65 0 28.65
Jan 29, 1990 26.54 29.75 26.46 26.97 0 26.97
Jan 26, 1990 27.48 32.18 26.49 27.27 0 27.27
Jan 25, 1990 24.45 27.33 24.00 26.34 0 26.34
Jan 24, 1990 30.17 30.36 23.99 24.86 0 24.86
Jan 23, 1990 27.04 28.05 24.55 24.96 0 24.96
Jan 22, 1990 21.45 28.35 21.25 27.97 0 27.97
Jan 19, 1990 22.86 22.98 21.35 21.59 0 21.59
Jan 18, 1990 25.14 26.03 22.96 23.00 0 23.00
Jan 17, 1990 22.61 23.84 21.45 23.67 0 23.67
Jan 16, 1990 27.12 27.71 22.55 23.16 0 23.16
Jan 15, 1990 26.13 26.66 25.18 26.08 0 26.08
Jan 12, 1990 23.78 27.51 23.56 26.03 0 26.03

That was 7 days over 26 and no days 30 or higher.

And, this is the nit. The VIX data starting in January 1990 does not show the same burst up as the S & P 100 volatility index:

VIX Data:

Jan 31, 1990 25.36 25.36 25.36 25.36 0 25.36
Jan 30, 1990 27.25 27.25 27.25 27.25 0 27.25
Jan 29, 1990 26.44 26.44 26.44 26.44 0 26.44
Jan 26, 1990 26.28 26.28 26.28 26.28 0 26.28
Jan 25, 1990 25.63 25.63 25.63 25.63 0 25.63
Jan 24, 1990 25.39 25.39 25.39 25.39 0 25.39
Jan 23, 1990 24.72 24.72 24.72 24.72 0 24.72
Jan 22, 1990 26.70 26.70 26.70 26.70 0 26.70
Jan 19, 1990 22.50 22.50 22.50 22.50 0 22.50
Jan 18, 1990 24.34 24.34 24.34 24.34 0 24.34
Jan 17, 1990 24.16 24.16 24.16 24.16 0 24.16
Jan 16, 1990 24.18 24.18 24.18 24.18 0 24.18
Jan 15, 1990 26.34 26.34 26.34 26.34 0 26.34
Jan 12, 1990 24.64 24.64 24.64 24.64 0 24.64

The above series only has 5 days over 26. That is an anomaly given the historical trends in volatility data for those two indexes.

In my opinion. this 1989 VXO history needs to be taken into account when counting the days for a Trigger Event. I have used 7 to 10 days and requiring two VIX numbers of over 30 to use 7 or 8 days. This historical data would require using 7 days when there is one day of 30 followed by evidence of the characteristic whipsaw Unstable Vix Pattern. That second series of data would consequently confirm the first eruption as a Trigger Event.

So, with the second eruption, I now have a Trigger Event consisting of two bursts of 7 days back to back.

Now, I have what is defined as a "recovery period".

Recovery Period:

Mar 29, 1990 18.82 19.82 18.52 18.87 0 18.87
Mar 28, 1990 18.65 18.86 17.77 17.94 0 17.94
Mar 27, 1990 20.32 20.39 18.10 18.17 0 18.17
Mar 26, 1990 19.48 19.99 19.13 19.60 0 19.60
Mar 23, 1990 20.75 20.78 19.84 20.12 0 20.12
Mar 22, 1990 19.39 23.68 19.37 21.26 0 21.26
Mar 21, 1990 18.51 18.97 18.00 18.85 0 18.85
Mar 20, 1990 16.99 18.22 16.53 17.75 0 17.75
Mar 19, 1990 17.08 17.89 15.94 15.94 0 15.94
Mar 16, 1990 16.69 17.14 15.89 15.92 0 15.92
Mar 15, 1990 18.19 18.62 17.50 17.79 0 17.79
Mar 14, 1990 19.40 19.97 17.84 18.44 0 18.44
Mar 13, 1990 19.27 20.24 18.71 19.69 0 19.69
Mar 12, 1990 19.56 20.13 18.47 18.64 0 18.64
Mar 9, 1990 19.09 19.76 18.31 18.39 0 18.39
Mar 8, 1990 19.24 19.74 17.93 18.22 0 18.22
Mar 7, 1990 18.42 19.97 18.27 19.51 0 19.51
Mar 6, 1990 20.05 20.71 18.35 18.56 0 18.56
Mar 5, 1990 19.81 20.41 19.09 19.84 0 19.84
Mar 2, 1990 20.46 20.46 19.19 19.46 0 19.46

The lowest VXO closing price in that series was 15.92 (3/16/1990). The S & P 500 closed that day at 341.90 or almost exactly at the same level as highlight above in the immediately preceding recovery period: Historical Prices | S&P 500

This modification does not impact the current TE. It is a modifcation to conform to prior history that may become relevant in the future. History can modify the rules for a historically based model.

This data also requires me to amend my previous statement that the Unstable Vix Pattern can last for years. While this Unstable Pattern lasted for more than 1 year, the Stable Pattern had re-emerged in early 1991 so it would not have paid to pare at all in this scenario. It would have been worthwhile to buy the dip later in October 1990 when the SPX fell slightly below 300 and had several days near that level. Historical Prices | S&P 500 While going down 42 points does not sound like an earth shaking event now, it was a 12% decline and almost 20% when using intra-day high and low numbers.

I simply do not know whether or not VIX volatility in October 1989, if they existed and the CBOE apparently has none, would have been a TE even when combined with the January 1990 readings and consequently there would have been no TE in the VIX data. There would have been one in the VXO data based on my modification discussed above.

So in conclusion on this topic, there was IMO a Trigger Event in October 1989, confirmed in January 1990 numbers, and in the numbers consistent with the Unstable Vix Pattern movement. In this historical example, it did not pay to pare because the Stable Pattern formed again in slightly more than a year thereafter. It would have paid to buy the 20% dip in the S & P 500. There was a 19.9% down move in 1990 that could have been avoided by the All or None investor following the model:

Figure 3:

Bull and Bear Markets and Corrections

In addition I would note that the volatility burst in the VXO in October 1989 and January 1990 did predate the declared onset of a recession.

The recession started in July 1990 and lasted until March 15, 1991:www.nber.org

It appears that the market had started its prolonged 1991 to October 1997 Stable Vix Pattern in early 1989 but was abruptly terminated due to external events.

We know that the Savings and Loan crisis started to emerge as a major problem in the late 1980s.

There was also a real estate collapse to go along with the banking collapse, as it usually does. For those of us living through that period, there was overbuilding in commercial real estate and a law change in the Tax Reform 1986 that deflated overinflated commercial real estate prices:

Tax Reform Act of 1986 - Wikipedia

There were real estate partnerships throughout the nation that would overpay for real estate or did not care what they paid since they were making a good living packaging those overpriced deals and selling them to the rich who wanted accelerated tax deductions. The rich did not care how much the general partner overpaid since they were focusing just on the use of the deal as a tax shelter for other income. The amount of the accelerated depreciation would go up with the value of property bought. So here, the tax code was causing non-economic investments and then the tax code took them away to a large extent.

Then you had the FED meddling too much by raising interest rates. The FF rate went from 6.5% in March 1988 to almost 10% in 1989. Then after the economy was in a recession, the FED took the rate back down to 8 to 8.5%!! FF Data

During the recession, the federal funds rate was over 7%.

Historical Changes of the Target Federal Funds and Discount Rates - Federal Reserve Bank of New York

Iraq's invasion of Kuwait also sent crude prices up close to 100%. Crude Oil Prices: West Texas Intermediate (NYSE:WTI) - Cushing, Oklahoma-St. Louis Fed The FED was apparently unduly concerned about temporary factors boosting the inflation rate and consequently helped only to help create a recession. CPI did have a spurt starting in 1989: Consumer Price Index, 1913- | Federal Reserve Bank of Minneapolis

The overall recovery from that recession was slow at the outset so the FED kept reducing the FF during 1991 and 1992.

There was a falloff in commercial loans after the recession officially came to an end:Commercial And Industrial Loans, All Commercial Banks- St. Louis Fed

Economists come up with other reasons for the 1990 recession including a sharp decline in aggregate spending starting in 1989. However, that observation does not tell us why that happened.

This kind of examination of external events is relevant to make an informed judgment about the longevity of the problems and their likely impact.

Lastly, I would emphasize the following points. I have noted in the past that the entire period between August 1982-2000 was a secular bull market, and that is an important consideration for anyone able to tolerate corrections, dips and cyclical bear markets. There was a cyclical bear market that was ushered into existence with the 1987 crash. And, as previously noted, that cyclical bear pattern lasted until 1991 when the S & P 500 made a sustained movement above the pre-October 1987 high. An investor could have sold in the recovery period after the spring 1987 TE and missed the roller coaster ride altogether by buying with the formation of the Stable Vix Pattern in 1991.

The Model and Recession Forecasts:

I decided to write this segment after reading this article: Goldman Sachs Thinks This Volatility Index Should Be Much Lower - Bloomberg Business

In a report issued to its clients, GS made the following erroneous statement:

"While extreme VIX levels periodically occur, our analysis shows that VIX levels in the high-twenties to low thirties for extended periods of time are rare outside of recessions."

There were elevated readings such as the recent ones in October 1989 and January 2000 using the volatility index for a more stable index than the S & P 500. A recession followed shortly thereafter but the high numbers clearly started months before the onset of a recession.

In addition to the warning about the 1990 economic downturn, the August 2007 TE and its November 2007 Confirmation Event preceded a recession that started in December 2007.

There was no recession with the huge volatility number in October 1987 and very high numbers for the second half of 1988.

NBER shows no recession occurring between November 1982 through June 1990:

www.nber.org/cycles.html

Just to highlight what I mean by elevated numbers in 1988, which are rare according to GS without a recession, I will drop some of them here:

Feb 23, 1988 29.12 31.04 28.58 29.76 0 29.76
Feb 22, 1988 29.35 29.64 28.00 28.41 0 28.41
Feb 19, 1988 31.39 31.70 27.53 27.53 0 27.53
Feb 18, 1988 32.43 32.98 30.71 31.80 0 31.80
Feb 17, 1988 32.81 33.16 31.34 32.07 0 32.07
Feb 16, 1988 34.69 35.44 32.47 32.86 0 32.86
Feb 12, 1988 34.75 35.97 33.89 33.95 0 33.95
Feb 11, 1988 36.21 38.46 35.86 37.39 0 37.39
Feb 10, 1988 36.27 36.69 34.25 35.09 0 35.09
Feb 9, 1988 37.00 37.05 34.15 34.15 0 34.15
Feb 8, 1988 40.09 40.41 37.52 37.96 0 37.96
Feb 5, 1988 38.09 39.14 37.33 38.47 0 38.47
Feb 4, 1988 38.55 39.79 38.30 38.32 0 38.32
Feb 3, 1988 36.94 39.36 35.32 38.63 0 38.63
Feb 2, 1988 37.15 38.55 35.68 36.17 0 36.17
Feb 1, 1988 34.91 36.73 34.71 36.73 0 36.73
Jan 29, 1988 35.68 37.38 35.12 35.55 0 35.55
Jan 28, 1988 36.57 37.16 35.98 36.31 0 36.31
Jan 27, 1988 37.09 38.23 35.75 36.69 0 36.69
Jan 26, 1988 37.30 37.58 35.69 36.48 0 36.48
Jan 25, 1988 37.85 38.48 35.75 35.95 0 35.95
Jan 22, 1988 38.91 40.22 37.71 38.21 0 38.21
Jan 21, 1988 40.53 42.46 39.53 40.42 0 40.42
Jan 20, 1988 37.21 40.91 35.36 39.87 0 39.87
Jan 19, 1988 36.61 37.40 34.33 35.97 0 35.97
Jan 18, 1988 35.87 36.72 34.16 35.19 0 35.19
Jan 15, 1988 38.45 39.55 35.89 36.37 0 36.37
Jan 14, 1988 41.40 44.18 40.55 42.22 0 42.22
Jan 13, 1988 44.26 45.28 37.63 41.59 0 41.59
Jan 12, 1988 42.87 46.94 39.70 41.20 0 41.20
Jan 11, 1988 48.54 52.60 40.54 40.54 0 40.54
Jan 8, 1988 34.79 50.41 34.51 49.36 0 49.36
Jan 7, 1988 37.36 37.57 33.89 34.36 0 34.36
Jan 6, 1988 38.18 38.28 35.93 37.06 0 37.06
Jan 5, 1988 35.68 38.21 35.27 36.90 0 36.90
Jan 4, 1988 37.20 38.03 34.88 36.49 0 36.49

Maybe I need to drop some more:

Apr 22, 1988 28.61 29.70 27.58 28.05 0 28.05
Apr 21, 1988 28.15 30.73 27.33 29.04 0 29.04
Apr 20, 1988 27.37 29.10 27.37 28.83 0 28.83
Apr 19, 1988 27.54 27.55 25.16 27.37 0 27.37
Apr 18, 1988 28.67 29.57 27.36 27.81 0 27.81
Apr 15, 1988 34.02 35.22 31.64 31.64 0 31.64
Apr 14, 1988 26.51 33.91 25.99 30.92 0 30.92
Apr 13, 1988 26.20 27.31 25.84 26.10 0 26.10
Apr 12, 1988 25.18 25.93 24.39 25.75 0 25.75
Apr 11, 1988 23.96 26.18 23.36 25.83 0 25.83
Apr 8, 1988 25.57 25.87 24.11 25.45 0 25.45
Apr 7, 1988 25.72 26.41 25.39 25.65 0 25.65
Apr 6, 1988 27.74 28.04 24.41 24.75 0 24.75
Apr 5, 1988 31.23 31.26 28.32 28.54 0 28.54
Apr 4, 1988 30.80 32.57 30.00 31.30 0 31.30
Mar 31, 1988 31.14 31.78 26.94 26.94 0 26.94
Mar 30, 1988 30.50 32.39 29.85 32.39 0 32.39
Mar 29, 1988 31.78 32.14 30.03 32.12 0 32.12
Mar 28, 1988 33.89 34.51 31.99 32.49 0 32.49
Mar 25, 1988 31.76 34.49 31.06 34.24 0 34.24
Mar 24, 1988 29.85 33.00 29.47 31.89 0 31.89
Mar 23, 1988 27.82 28.26 26.82 27.22 0 27.22
Mar 22, 1988 27.10 28.24 26.73 27.54 0 27.54
Mar 21, 1988 29.01 29.47 27.53 28.01 0 28.01
Mar 18, 1988 27.42 29.27 26.75 28.02 0 28.02
Mar 17, 1988 28.68 29.01 26.62 26.62 0 26.62
Mar 16, 1988 29.57 30.90 28.28 28.64 0 28.64
Mar 15, 1988 28.81 29.96 28.68 29.14 0 29.14
Mar 14, 1988 28.66 29.56 28.31 28.66 0 28.66
Mar 11, 1988 30.68 31.83 27.56 27.64 0 27.64
Mar 10, 1988 28.25 30.14 27.37 30.11 0 30.11
Mar 9, 1988 28.88 28.92 27.29 27.85 0 27.85
Mar 8, 1988 28.22 28.39 27.66 28.01 0 28.01
Mar 7, 1988 29.35 29.42 28.31 28.39 0 28.39
Mar 4, 1988 30.13 32.52 29.22 29.35 0 29.35
Mar 3, 1988 30.64 31.30 30.13 30.27 0 30.27

To emphasize the point, I will drop some more:

Jun 6, 1988 25.46 25.74 24.66 25.06 0 25.06
Jun 3, 1988 26.04 26.38 25.27 25.27 0 25.27
Jun 2, 1988 24.92 25.70 24.70 25.16 0 25.16
Jun 1, 1988 23.33 25.16 23.20 24.53 0 24.53
May 31, 1988 24.69 24.69 23.04 23.34 0 23.34
May 27, 1988 24.34 25.29 24.03 24.47 0 24.47
May 26, 1988 24.46 24.99 24.12 24.25 0 24.25
May 25, 1988 23.56 24.59 23.51 24.48 0 24.48
May 24, 1988 25.27 25.58 24.16 24.55 0 24.55
May 23, 1988 25.25 26.08 24.93 25.22 0 25.22
May 20, 1988 26.19 26.81 25.04 25.68 0 25.68
May 19, 1988 28.09 28.77 26.46 26.83 0 26.83
May 18, 1988 26.39 28.48 25.74 27.19 0 27.19
May 17, 1988 25.60 26.40 24.61 25.25 0 25.25
May 16, 1988 26.00 26.75 25.10 25.27 0 25.27
May 13, 1988 25.72 26.23 25.34 25.60 0 25.60
May 12, 1988 27.51 27.87 26.41 26.70 0 26.70
May 11, 1988 26.29 29.55 26.29 28.05 0 28.05
May 10, 1988 25.00 26.00 24.24 24.62 0 24.62
May 9, 1988 26.04 26.47 25.34 25.58 0 25.58
May 6, 1988 27.15 27.35 26.28 26.62 0 26.62
May 5, 1988 27.63 28.45 27.26 27.76 0 27.76
May 4, 1988 25.96 27.52 25.81 26.85 0 26.85
May 3, 1988 25.62 25.90 25.08 25.43 0 25.43
May 2, 1988 26.68 27.29 26.18 26.31 0 26.31
Apr 29, 1988 27.95 28.54 26.97 27.04 0 27.04
Apr 28, 1988 26.63 28.62 26.30 27.09 0 27.09
Apr 27, 1988 25.54 26.42 24.93 25.52 0 25.52
Apr 26, 1988 26.46 27.14 24.70 24.92 0 24.92
Apr 25, 1988 27.42 27.79 26.02 26.50 0 26.50

To drive the point home there was no recession after the TE in the 1987 spring, but there was a stock market crash and a multi-year period of churn.

There was no relevant time connection either between the the October-December 1997 Trigger Event and the March 2001 start of a recession. Both the April 1987 and the 1997 TEs were relevant to stock allocations and trading strategies however.

The October/November 1997 TE had higher numbers for longer than the current one. The Vix Numbers also became elevated for a long time starting in August 1998 with no recession yet in site. Those high VIX numbers are consistent with an ongoing Unstable Vix Pattern. VIX Historical Prices The elevation in the VIX number during the later half of 1998 and into 1999 were connected to events similar to what caused the 1997 TE, but there were also several aggravating factors including the collapse of Long Term Capital Management.

Nov 12, 1998 28.63 29.66 27.93 29.28 0 29.28
Nov 11, 1998 27.28 29.07 27.25 28.47 0 28.47
Nov 10, 1998 28.20 28.59 27.31 28.17 0 28.17
Nov 9, 1998 26.93 28.72 26.89 28.09 0 28.09
Nov 6, 1998 25.91 26.47 25.60 25.70 0 25.70
Nov 5, 1998 27.52 28.31 26.00 26.01 0 26.01
Nov 4, 1998 26.98 27.94 26.50 27.37 0 27.37
Nov 3, 1998 26.60 28.19 26.60 27.76 0 27.76
Nov 2, 1998 28.31 28.72 27.20 27.26 0 27.26
Oct 30, 1998 28.28 28.71 27.54 28.05 0 28.05
Oct 29, 1998 32.09 32.26 29.39 29.50 0 29.50
Oct 28, 1998 33.77 33.77 31.97 32.42 0 32.42
Oct 27, 1998 31.20 33.27 30.74 32.95 0 32.95
Oct 26, 1998 33.25 33.26 31.38 32.38 0 32.38
Oct 23, 1998 31.90 32.70 31.69 32.27 0 32.27
Oct 22, 1998 33.90 34.17 31.32 31.53 0 31.53
Oct 21, 1998 33.27 34.55 32.99 33.21 0 33.21
Oct 20, 1998 30.81 33.36 29.82 33.11 0 33.11
Oct 19, 1998 35.94 36.01 32.41 33.13 0 33.13
Oct 16, 1998 34.01 35.78 33.62 34.82 0 34.82
Oct 15, 1998 39.61 39.66 32.41 33.34 0 33.34
Oct 14, 1998 40.92 40.93 38.01 38.96 0 38.96
Oct 13, 1998 40.97 41.60 39.96 40.23 0 40.23
Oct 12, 1998 40.55 40.56 39.40 40.07 0 40.07
Oct 9, 1998 43.28 45.36 41.85 42.20 0 42.20
Oct 8, 1998 47.07 49.53 45.58 45.74 0 45.74
Oct 7, 1998 40.98 44.84 40.66 43.51 0 43.51
Oct 6, 1998 40.16 42.05 39.72 41.20 0 41.20
Oct 5, 1998 42.65 45.56 42.30 42.81 0 42.81
Oct 2, 1998 42.17 43.38 40.25 40.47 0 40.47
Oct 1, 1998 41.90 43.98 41.85 43.48 0 43.48
Sep 30, 1998 37.16 41.15 37.10 40.95 0 40.95
Sep 29, 1998 37.17 38.39 35.74 36.08 0 36.08
Sep 28, 1998 34.20 35.24 33.52 34.87 0 34.87
Sep 25, 1998 37.14 37.29 33.91 34.55 0 34.55
Sep 24, 1998 33.78 35.90 33.06 34.66 0 34.66
Sep 23, 1998 35.03 35.14 32.44 32.47 0 32.47
Sep 22, 1998 37.85 38.91 36.47 36.62 0 36.62
Sep 21, 1998 42.74 42.74 38.39 38.58 0 38.58
Sep 18, 1998 39.44 39.84 38.51 38.63 0 38.63
Sep 17, 1998 39.43 40.11 38.82 39.23 0 39.23
Sep 16, 1998 35.93 37.73 35.72 35.94 0 35.94
Sep 15, 1998 38.37 38.73 36.43 36.58 0 36.58
Sep 14, 1998 40.89 40.89 37.53 38.57 0 38.57
Sep 11, 1998 47.95 48.06 43.74 43.74 0 43.74
Sep 10, 1998 43.89 46.56 43.72 45.29 0 45.29
Sep 9, 1998 37.86 39.80 37.56 39.66 0 39.66
Sep 8, 1998 40.11 40.34 37.70 37.90 0 37.90
Sep 4, 1998 40.66 44.19 40.58 43.31 0 43.31
Sep 3, 1998 40.96 42.68 40.01 41.43 0 41.43
Sep 2, 1998 35.21 36.76 34.02 36.76 0 36.76
Sep 1, 1998 41.74 44.94 36.08 36.48 0 36.48
Aug 31, 1998 39.74 45.02 38.80 44.28 0 44.28
Aug 28, 1998 38.40 42.78 38.40 39.60 0 39.60
Aug 27, 1998 33.65 39.48 33.65 38.55 0 38.55
Aug 26, 1998 31.95 32.65 30.44 31.14 0 31.14
Aug 25, 1998 29.31 30.82 28.49 30.33 0 30.33
Aug 24, 1998 31.69 32.58 31.30 31.80 0 31.80
Aug 21, 1998 32.59 36.93 32.59 33.14 0 33.14
Aug 20, 1998 29.27 30.54 29.24 30.00 0 30.00
Aug 19, 1998 27.56 29.26 27.35 28.69 0 28.69
Aug 18, 1998 30.66 30.81 28.36 28.40 0 28.40
Aug 17, 1998 34.77 34.77 31.86 31.86 0 31.86
Aug 14, 1998 29.86 34.61 29.84 34.34 0 34.34
Aug 13, 1998 28.20 29.98 28.17 29.92 0 29.92
Aug 12, 1998 29.41 29.75 28.51 28.55 0 28.55
* Close price adjusted for dividends and splits.
Feb 19, 1999 30.01 30.12 28.61 29.30 0 29.30
Feb 18, 1999 30.99 31.14 30.32 30.45 0 30.45
Feb 17, 1999 30.21 30.95 29.16 30.65 0 30.65
Feb 16, 1999 28.88 30.04 28.73 29.65 0 29.65
Feb 12, 1999 27.85 30.46 27.85 29.76 0 29.76
Feb 11, 1999 30.03 30.16 27.42 27.42 0 27.42
Feb 10, 1999 31.59 31.75 30.45 30.45 0 30.45
Feb 9, 1999 29.96 31.41 29.84 31.36 0 31.36
Feb 8, 1999 29.53 30.77 29.53 30.27 0 30.27
Feb 5, 1999 29.69 30.54 29.46 29.67 0 29.67
Feb 4, 1999 27.62 29.49 27.58 29.48 0 29.48
Feb 3, 1999 28.59 29.03 27.62 27.88 0 27.88
Feb 2, 1999 28.19 29.46 28.11 28.16 0 28.16
Feb 1, 1999 27.21 27.74 26.76 27.67 0 27.67
Jan 29, 1999 27.77 28.55 25.90 26.25 0 26.25
Jan 28, 1999 29.25 29.51 28.01 28.11 0 28.11
Jan 27, 1999 28.28 29.81 28.24 29.73 0 29.73
Jan 26, 1999 30.92 30.96 29.23 29.23 0 29.23
Jan 25, 1999 32.22 32.71 31.13 31.13 0 31.13
Jan 22, 1999 32.26 32.81 31.10 31.95 0 31.95
Jan 21, 1999 29.55 31.37 29.23 30.92 0 30.92
Jan 20, 1999 28.62 29.04 27.62 28.60 0 28.60
Jan 19, 1999 28.86 30.61 28.80 29.24 0 29.24
Jan 15, 1999 32.56 32.56 29.14 29.24 0 29.24
Jan 14, 1999 30.46 33.66 30.20 32.98 0 32.98
Jan 13, 1999 32.62 32.85 28.78 30.11 0 30.11
Jan 12, 1999 25.59 28.32 25.55 28.10 0 28.10
Jan 11, 1999 21.41 25.81 21.38 25.46 0 25.46
Jan 8, 1999 22.95 24.08 22.81 23.28 0 23.28
Jan 7, 1999 24.42 24.90 24.04 24.37 0 24.37
Jan 6, 1999 23.36 23.38 22.68 23.34 0 23.34
Jan 5, 1999 25.92 25.98 24.36 24.46 0 24.46
Jan 4, 1999 25.38 26.96 24.74 26.17 0 26.17
Dec 31, 1998 23.74 24.76 23.67 24.42 0 24.42
Dec 30, 1998 22.03 23.56 22.03 23.34 0 23.34
Dec 29, 1998 23.68 24.00 22.11 22.18 0 22.18
Dec 28, 1998 22.92 23.97 22.91 23.50 0 23.50
Dec 24, 1998 21.00 21.78 20.66 21.48 0 21.48
Dec 23, 1998 21.89 22.06 20.08 20.21 0 20.21
Dec 22, 1998 24.05 24.45 22.75 22.78 0 22.78
Dec 21, 1998 24.64 24.64 23.09 23.86 0 23.86
Dec 18, 1998 26.80 26.96 25.04 25.04 0 25.04
Dec 17, 1998 29.42 29.42 27.94 27.96 0 27.96
Dec 16, 1998 29.13 30.28 29.13 29.96 0 29.96
Dec 15, 1998 31.38 31.38 29.42 29.42 0 29.42
Dec 14, 1998 29.86 31.67 29.57 31.31 0 31.31
Dec 11, 1998 27.93 28.83 27.29 27.72 0 27.72
Dec 10, 1998 25.73 26.91 25.73 26.81 0 26.81
Dec 9, 1998 25.78 26.48 25.49 25.66 0 25.66
Dec 8, 1998 25.05 26.25 24.64 25.58 0 25.58
Dec 7, 1998 25.59 25.96 24.82 24.90 0 24.90
Dec 4, 1998 26.28 26.76 25.08 25.31 0 25.31
Dec 3, 1998 25.53 28.77 25.13 28.70 0 28.70
Dec 2, 1998 25.63 26.52 25.28 25.43 0 25.43
Dec 1, 1998 27.38 27.40 24.84 24.97 0 24.97
Nov 30, 1998 22.79 26.01 22.79 26.01 0 26.01
Nov 27, 1998 22.43 22.47 21.98 22.09 0 22.09
Nov 25, 1998 23.48 23.68 22.08 22.15 0 22.15
Nov 24, 1998 22.32 23.65 22.10 23.28 0 23.28
Nov 23, 1998 22.20 22.23 21.24 21.84 0 21.84
Nov 20, 1998 24.01 24.01 22.43 22.47 0 22.47
Nov 19, 1998 26.10 26.40 25.31 25.50 0 25.50
Nov 18, 1998 28.13 28.46 27.13 27.13 0 27.13
Nov 17, 1998 29.34 30.56 27.21 27.95 0 27.95
Nov 16, 1998 28.79 29.58 28.78 28.90 0 28.90
Nov 13, 1998 29.49 29.60 28.93 29.03 0 29.03

For GS to say that the elevated numbers since 8/21/15 are rare outside of a recession is a most inaccurate statement.

The VIX remained in an unstable pattern after the 1997 TE, with only brief periods of below 20 movements, until 2003. Consequently, the model gave the correct signal to sell in February 1998 and then buy back in 2003. The blow off phase in 1999, an expected occurrence in a long term secular bull market, was never confirmed by the VIX movement and consequently the Model was flashing a sell signal into the parabolic and insane 1999 spike rather than to buy. The stock and VIX movement that year were giving drastically different signals: Start of 1999 VIX Historical Prices The VIX was screaming over and over-SELL into this Madness:

This next chart focuses just on 1999 and consequently has more data points:

This is the corresponding 1 year charts for the S & P 500 and the Nasdaq composite:

SPX 1999:

Nasdaq composite 1999:

GS is just wrong. An elevated VIX spike can occur without a recession and has done so on many occasions. It is not rare at all. The TE has some predictive value for a recession onset in 4 to 8 months but that is no more than 50/50. It is more valuable as a WARNING about potential bad stock market events.

How To Respond to a Trigger Event:

The most important thoughts which flow from the Trigger Event is that something has fundamentally changed in the market and a far more difficult market may lie ahead. The external events causing the TE need to be identified as far as humanely possible and studied by the investor. This requires work.

The research will guide the investor as to a set of material events that need to be monitored daily.

An understanding of the underlying cause may at a minimum impact asset allocations.

I started seeing negative data coming out of Asia early this year. I was also concerned about the parabolic spike in China's stock market. I reacted by slashing my allocation first to Asia's stocks. This occurred prior to the U.S. market's swoon starting on August 21st and before significant damage was done to those holdings:

Eliminated Matthews Asian Growth & Income (MUTF:MACSX) at $17.77

Eliminated Matthews China Dividend Fund (MUTF:MCDFX) at $17.72

Sold 100 CHN at (5/4/15):

Sold 80 CHN at $21.7312 (4/16/15):

I then prematurely bought back 100 CHN in two 50 share lots at $17.25 and $17.79 discussed in these CEF Updates: Update For Closed End Fund Basket Strategy As Of 8/14/15 - South Gent | Seeking Alpha; Update On Closed End Fund Basket Strategy As Of 7/28/15 - South Gent | Seeking Alpha

I also sold the few EM ETFs that I owned including VWO at $43.69:

Eliminated VEU at 50.39 and VWO at 43.69 -Roth IRA (4/15/15 Post)

The overall net reduction was close to $20K and my exposure was very light in Asian stocks before I hacked it to pieces. So the first order of business for me at least was to sell the epicenter.

The epicenter of what is happening now is in ASIA, and that was evident before the TE.

The cause of the August 2007 TE was likewise evident as investors were flooded with information about the piercing of the housing bubble and massive defaults in subprime mortgages for several months prior to the August 2007 TE. (e.g. just limiting my links to Bloomberg articles here: Subprime Time Bomb (2/9/07); A Primer for the Subprime Problem (3/3/07); A Sinking Sensation for Subprime Loans (2/14/07) Subprime Mortgage Derivatives Extend Drop on Moody's Reviews (2/22/07); Subprime Fiasco Exposes Manipulation by Mortgage Brokerages (5/30/2007), Why Subprime Lenders Are In Trouble (5/2/2007), and etc and so on.

Maybe I read over a 1000 stories before August 2007. And that was reflected by my virtual elimination of stock mutual funds and stock ETFs before August 2007 (see e.g. snapshots at Stocks, Bonds & Politics near the end)

Most simply chose to ignore it or downplay it as Uncle Ben did. FRB: Testimony, Bernanke--The economic outlook--March 28, 2007

The conditions that caused the TE will need to improve before the Unstable Vix Pattern can be terminated with the onset of another Stable Vix Pattern.

Other factors may come into play, including a stretched or excessive SPX valuation or other unfavorable economic events that flow naturally from the original problem or possibly even unconnected new ones. There was a parade of adverse U.S. centric events in 1989-1990.

So what caused this last Trigger Event which is still in motion and how will it impact my allocations? That subject will be addressed when I update my Portfolio Positioning and Management post which is scheduled to be my next post.

For now, the TE will have no impact on my overall stock allocation until there is a recovery period, which may not occur, where I will then consider reducing my stock allocation by up to 10%. At a minimum, I will sell one mutual fund then with a $6K current unrealized gain. I have no intention of selling into a downturn now given my already defensive positioning with over a 30% cash allocation along with bonds and preferred stocks. Almost my entire portfolio throws off income which is also material to what I will do now.

I would look to trim only with a return to SPX above the levels prior to August 21, 2015.

My response will be governed by an assessment of my own current fiscal situation.

The Model does not tell an individual what to do or how much to sell after a Trigger Event. That is up to each individual based on their emotional tolerance for risk, ability to manage it, and most importantly their unique situational risks. Some investors may decide that they can handle whatever happens, both emotionally and financially, by staying the course.

Until that "courage" is tested by real events like a crash or a 45%+ decline, then that tolerance is basically an unknown unless the investor has been tested at least by a 20% decline. If the investor did meaningful selling into a 10% decline, then I believe the question has already been answered about how they will react when something serious happens and it will.

Humans do not handle spikes in volatility well. The natural reaction is to flee as many have already done. Many investors sold out of stocks at the worst possible time in 2000-2002 and September 2008-May 2009.

Lower stock prices become necessary to compensate investors for the increased risks associated with highly volatile movement. Humans need tranquility, calmness, and comfort. Those conditions are met when the VIX moves continuously below 20. Those conditions are not met when the VIX moves out of that stable pattern of relatively low volatility and starts whipsawing up and down at higher levels.

For the Model, the next important series of data points would be for how long the VIX remains at elevated levels, whether there is a recovery period as defined in model and how long does it last, and whether there are multiple moves in the VIX consistent with an ongoing Unstable Vix Pattern movement as defined in the Model.

Disclaimer: I am not a financial advisor but simply an individual investor who has been managing my own money since I was a teenager. In this post, I am acting solely as a financial journalist focusing on my own investments. The information contained in this post is not intended to be a complete description or summary of all available data relevant to making an investment decision. Instead, I am merely expressing some of the reasons underlying the purchase or sell of securities. Nothing in this post is intended to constitute investment or legal advice or a recommendation to buy or to sell. All investors need to perform their own due diligence before making any financial decision which requires at a minimum reading original source material available at the SEC and elsewhere. Each investor needs to assess a potential investment taking into account their personal risk tolerances, goals and situational risks. I can only make that kind of assessment for myself and family members.