The stock market has been wrestling with tariff demons since early October. Yes, there was an election but not a really big one. Normally the market tells us it likes split government so what’s wrong with moving Dems into the House?
There are 2 primary Intermarket variables that earn us forward return – ViX and Bonds. When I compare them, Vix turns out to be more reliable. We can set look-backs so traders feel more comfortable about when to add to positions in ES.
The paths are similar because Vix usually rises and falls with bonds (a safety option while fear rises) but there are enough exceptions over this 8-year window to create a nearly 50% performance advantage for Vix over bonds (1750 pts vs 1250pts.). What’s a little different here is that we are comparing Vix (and bonds) from a week ago to yesterday – then buying ES rather than comparing Vix yesterday to Vix from a week or more before that. This method needs to see old fading doubt rather than higher Vix than N days ago. The results don’t normally change/improve the outcomes this much.
How much do falling bonds hurt?
We can see above that we lost about 1100 of our trading point profit if bonds were not also rising with Vix. If we specifically wait for t-notes to rise with Vix then total profits also fall – down to a 1250 level, quite a drop considering the requirement doesn’t seem that onerous.
So Now What?
That 600 point gain shown in blue is a good measure of the current situation. Vix is helping and bonds are hurting. Over the last 8 years, we lost to the (unfiltered) market by 990 points. but drawdowns were better (See Dec. 2016) and yes, – now. That is perhaps a small comfort for those looking to make money because of this Vix rise but at least we know why this is so. Start cheering for bonds.
If bonds improve and Vix stays elevated then we can and must get excited again. Given their proclivity to rise and fall together, we just may not earn as much as we have in previous pullbacks.
We can see here that positive returns are only coming of late from Vix rises while bond declines are hurting us.