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Yesterday's VIX Rally MORE EXTREME Than 2008 Crash

|Includes: CBOE, SPDR S&P 500 Trust ETF (SPY), VXX
Yesterday's VIX Rally MORE EXTREME Than 2008 Crash


We are all now terrible familiar with the explosion in the VIX from the fall of 2008 when it reached highs near 90 before slowly retreating in 2009.  So what would you say if I told you that yesterday's selling that prompted the rist in the VIX was the fastest and most extreme move since January 22nd of 2008?  Hard to believe, hugh?

The way we measure this as technical analysts is through the use of Bollinger Bands around a daily chart of the VIX.  The Bollinger Bands simply plot the statistical calculation of standard deviation around the recent price action to let you know how "extreme" or statistically rare a price movement is.

The standard setting for Bollinger Bands is 2 standard deviations over the last 20 bars of price action.  That typical Bollinger Band is depicted below in Black.  These bands should encompass 95% of the price action, so the other 5% is the statistically rare events.

But how about 4 standard deviations?  How about 99.993% of all price action should fall within those levels.  I have plotted 4 standard deviation Bollinger Bands below in Blue.

SPX Daily Chart

So how many times have we seen a break above the upper 4 standard deviation Bollinger Band like we did yesterday?  Over the last 15 years going back to 1995, it has only happened 13 times.  There are about 250 trading days in any calendar year, so over the last 15 years there have been about 3,750 trading days, and only 13 times have we seen this happen, or 0.346% of the time.  Those times are listed below.

2/27/2007 (on the close)
10/28/1997 (on the close)

There are a few items to take note of in that list.  First of all, we haven't seen this wild of a statistical even during the major market events of Fall 2008 when Lehman Brothers filed for Bankruptcy or when Congress failed to pass TARP the first time.  It also didn't happen after 9/11/2001 when the markets re-opened after the terrorist attacks, and it didn't happen in 1998 when Long Term Capital Management collapsed.  In short, this rarely happens, but it did yesterday, and that is why so many computer systems mal-functioned in that 30 minute span.

Also, 9 of the 13 times have been in May-October, the traditionally weaker 6 months of the year when some market forecasters tell you to "Sell in May and Go Away".  There is also a strong correlation of this happening during the "Dog Days of Summer", as 5 of the 13 have happened in July and August.

Plus, these surges on the VIX appear to only take place during times of shear panic, because we haven't seen the VIX close below the lower 4 standard deviation Bollinger Band at all in the last 15 years!

Finally, there have only been two times where we have seen a close outside of those bands in the last 15 years.  This equates to only 0.053% of the time.  Or said another way, 99.946% of the time over the last 15 years, we have traded within the 4 deviation bands.  The other 11 times, we just saw intra-day price action outside of them.  Yesterday was not a close above them either.

Bottom Line
So that data is interesting, but how can it help you to make money?  The last three times that we have seen a breach of the upper band, the market has been flat or higher two weeks later.  This suggests that the majority of the damage has been done, at least in the very short term.  Although the market could go lower a bit from here, it is very unlikely that we would see a quick meltdown of 4% like yesterday.

Be cautious with your trading over the next few days, and take profits when you have them on your put trades, because this data tells us that many of the bear profits have already been made in this market decline.

Scott Downing
Director of Research

Disclosure: No positions