Although the high of VIX was below 11 on January 27 of this year, the SPY ETF has gained 1.11% since. Some traders expected a quick rise in volatility and shorted the market but any gains in VIX evaporated fast and last Friday the high was again below 11. Shorting the market based on low VIX is not supported by analysis.
Since 1992 a VIX daily high less than 11 has occurred 56 times, or less than 1% of the time, as shown in the chart below.
Due to low volatility clustering effect, a strategy that shorted SPY at the close if the VIX high was below 11 and exited after 10 days at the close has generated only 14 trades. The equity performance is shown below.
The win rate is about 29% and Sharpe is barely positive for fully invested equity. In other words, anyone shorting the market based on low VIX readings has wasted time and money. If not for a large gain in 2007, this strategy would have been a net loser.
As shown in the chart below, the high of VIX was below 11 on January 27 but since SPY has gained 1.11%. The trade exited at the close of Friday after 10 days while the VIX high fell again below 11.
Those who hesitate to short at this point do it for a good reason: analysis does not support shorting the market when VIX is at very low levels. Statistics published in social media about VIX changes after low values have little use for that.
If you have any questions or comments, happy to connect on Twitter: @mikeharrisNY
Charting and backtesting program: Amibroker
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