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Post Trauma Calm – Is it still safe?

I’ve written about the somewhat dim-witted idea of buying the stock market after trauma is over. This is not the same as waiting for Vix to rise N standard deviations above its moving average. In this case you wait to buy the S&P after it has closed at least once above that line, and then crosses below its average. You then hold it unless it crosses back above the moving average. Here are the rules:

  1. Wait until Vix closes above its 10 day average + 1.5 Std Dev (10)
  2. Buy after Vix then closes below the 10-day average
  3. Exit if close of Vix crosses above the 10-day average.

Rather than look to buy the market at it’s low, when Vix has spiked, we’re waiting for everything to calm down. The only way this works is if other PM’s are slow to get back into long positions. The lines look like this:

Today’s move down may seem quite severe and such moves are often punishing but they don’t usually force you to give back all the profits you made since the buy signal. The next chart shows you recent trades:

We are never getting out at a high – we are patiently waiting for some mild new trauma to force us out. We need to attach a time out exit to the system. One can assume that after a certain number of days we become more exposed to another piece of bad news. The gains seem to peak out around 12 days but the relationship is rather unstable after 10 days. Here’s the P&L curve fr a 12 day exit:

The question at hand is how much reward do we get from holding on an extra day.

Below 10 days the profits do get cut off in a rather linear fashion. The answer is – we should either take profits at 10 days or so or we have to tighten stops.

Yesterday was day 11.

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