Where we stand in a Post Trauma Window is as important as what the level of fear is or what interest rates are doing. Trauma can be defined in a number of ways. We use a combination of variables that looks a little confusing at first, Let me explain its contents:
- We can replace Vix with a synthetic function (“SynVix”) that can then be applied to any market – even Vix itself. The SynVix of Vix will tell us how scared people are of a rise in the price of market insurance. It’s like turning fear upside down so a low level is good.
- Next, we can subtract Vix itself so we again get a buy level when the series is low.
Here’s what it looks like:
The times are marked when the series violates a reliable threshold. Most of these events are somewhat intuitive – you know there something bad is going on in the market and it usually involves a significant price decline.
This isn’t always true and we have a case now where SynVix(Vix) has fallen faster than Vix so the sum has fallen to the (buy) threshold. The trauma window count has been reset. The month or so after such periods are rarely connected to meaningful price declines.
Focusing on the level of Vix alone will not help you make money. The weekly fuel gauge is headed higher with the A/D line so if we get a short term pullback, the setup for equities will be bullish.