VIX Research Uncovers Huge Upside Opportunity for December 2020

by Michael Markowski

Research conducted to utilize the BBT Algorithm to trade VIX related securities has uncovered a huge upside opportunity.   The VIX research initiative was in support of Bear Trader’s recent first ever recommendation to its aggressive and conservative traders to purchase shares of UVXY and VXX respectively.  The prices for both of the shares mimic the VIX, which is the symbol for the CBOE’s Volatility index.

The CBOE’s real time quotes for its Volatility Index (VIX) are based on the ratio of outstanding call options and put options.  When the ratio of call options to put options increases indicating an increase in bullishness the VIX declines.  The vice versa is that when the ratio of put options to call options increases indicating an increase in bearishness the VIX increases.  The chart below depicts the VIX index and the VXX and UVXY shares for the 12 months ended 11/27/20.

The VIX which drives the share prices of the VXX and UVXY is not a stock.  Therefore, it does not increase or decrease based on supply and demand.  The VIX is 100% governed by the ratio of put to call options being purchased by investors and traders.  Due to this the VIX begins to spike up very quickly when the S&P 500 is declining.  Conversely, the VIX spikes down when the S&P 500 is increasing.   The VIX is THE LEADING INDICATOR for both market tops and bottoms.

The chart below depicts the bullish spikes for AAII’s weekly investor sentiment survey readings from below 45% to above 45% from January 2018 through November 2020.  An AAII investor sentiment survey reading is a contrary indicator.  Bullish ratios of 45% and above are indicative of a stock market top.  The rationale is that when the clear majority of AAII investors believe the market is going higher, they are already fully invested.  Thus, there is a limited amount of fuel to power the market higher.

The chart below overlays the UVXY on the AAII investor sentiment readings for the same period in the above chart.  Note that each of the new all-time low lows for the UVXY coincide with spikes in the bullish investor sentiment readings.  Note. VXX is not included since its shares did not start to trade until January 22, 2018.

The chart below overlays the S&P 500 on the AAII investor sentiment readings chart for the same period. The all-time highs depicted in the chart coincide with the AAII survey bullish sentiment highs.  An examination of the chart below and above will depict the inverse relationship between UVXY all-time lows and the S&P 500’s all-time highs.

The rationale for the Bear Trader to utilize the VXX and the UVXY was due to a back test which had been conducted on the highly leveraged TVIX shares which also mimic the VIX in early 2019.  In December 2018, the Bull & Bear Tracker had published two signals to trade the SPXS triple leveraged inverse ETF. The two at the time had been the Bull & Bear Tracker’s two best performing signals since inception.

The SPXS’s 31% gain from two signals in December 2018, warranted a back test for the TVIX.  The TVIX enabled an apple to apples comparison.  The degree of leverage employed by the TVIX is similar to the SPXS.  The TVIX for both dates in the table below outperformed the SPXS by almost three times, with an aggregate gain of 82.1%.

The results from the 2019 TVIX back test made it very clear.  During periods of high volatility, the Bull & Bear Tracker/Bear Trader could recommend the TVIX and other VIX related shares in lieu of the SPXS and SH inverse ETFs.  However, the issue that first had to be addressed was how to determine or measure when a period of extreme volatility had or would begin.  The VIX and the shares of TVIX, etc., which mimic the volatility index are highly volatile.  From the S&P 500’s February 2020 all-time high to its March 232020 low the TVIX increased by 1263% from $39.53 to $538.93. The chart below depicts that the TVIX traded for as high as $806.36 on March 18, 2020.

Note.  Due to the TVIX being delisted from NASDAQ in June 2020, and relegated to the bulletin board, I highly recommend that the shares not be traded since they are now extremely illiquid.   

We are primarily funded by readers. Please subscribe and donate to support us!

The VIX’s UVXY and VXX shares were recommended by Bear Trader on November 9th for the following reasons:

  • 2019 TVIX back tests
  • S&P 500 being near its all-time high
  • VXX and UVXY being near their 2020 lows

On November 12, 2020, a breakthrough occurred.  The AAII investor sentiment survey reading spiked to 55.84% of the investors surveyed being bullish compared to prior week’s 37.96%.

The spike in AAII sentiment resulted in the identification of a repeating pattern which revealed a bullish sentiment anomaly.  The anomaly could have been utilized to predict the last three market tops and periods of extreme market volatility which ensued.  For each of the five-week periods after the anomaly occurred, the S&P 500 declined by a minimum of 9.7% from its period highs to lows.  For two of the three periods depicted in the table below the total peak to trough declines were 100% greater than the five-week declines.

Discovering the metrics to identify the beginning of an extreme volatility period is significant.  It’s because two of Bulls Bears’ algorithms had proven their accuracy to predict the END of the extreme volatility period and major market bottom which occurred from March 17 to March 23, 2020.

  1. At the market open on March 17th, the signal for the BBT Algorithm which powers Bear Trader and Bull & Bear Tracker changed from RED to GREEN. The signal then remaining GREEN for seven consecutive days was extremely Bullish.   See “Bear Trader, Short the Market Algo up 40.6% since March 2020”.

From February 21 to March 16, the S&P 500 and the BBT’s signals were extremely volatile.  During the period:

  • GREEN signal did not remain in effect for two consecutive days.
  • There were 20 short (RED) to long (GREEN) signal changes
  • On March 16th the BBT signal changed five times from RED to GREEN and back to RED.

The BBT Algorithm’s empirical data from 02/21/20 to 3/23/20 is now being utilized to develop the BULL VIX algorithm.  The Bull VIX is to be utilized to buy the VIX related securities at S&P 500 all-time highs for triple digit profits.  The BBT’s proprietary empirical data from arguably one of the most volatile periods throughout the history of markets has increased its capability and reliability to predict major market bottoms.         

  1. SCPA Algorithm forecasted that the market had bottomed at the exact 3/23/20 bottom.  See, “Probability 87% that Market is at interim bottom” March 23, 2020.

The two algos utilized in conjunction would have enabled a trader to exit VXX and UVXY positions from March 17th to March 23rd.  The table below lists the events from January 23, 2020 when the Bullish Sentiment Anomaly occurred through the March 23, 2020 major bottom.  The table also depicts that the minimum gains from buying the VXX and UVXY on 1/23/20 and holding the shares to 3/23/20 ranged from 279% to 547% respectively.

The BBT algorithm has several types of RED and GREEN signals.  The most potent and rarest are Power REDs and Power GREENs.  The BBT has a track record for publishing Power RED signals at all-time highs and Power GREENs at major market bottoms.   BBT’s signal went to a Power RED on 10/4/18, the morning after the S&P 500 had closed at an all-time high which would not be eclipsed until 4/23/19.  Its Power GREEN on December 26, 2018 was the day after the 2018 XMAS Eve market bottom.  The signal went to a Power RED prior to the market open on 2/21/20, two days after the S&P 500 had closed at an all-time high.

While the probability is very high for the VIX to potentially spike to the upside soon it could first go substantially lower.  The VIX’s November 27, 2020 close at 20.84 was substantially higher than its 12.10 January 2929 low.   The two securities which mimic the VIX are closer to their 2020 lows.   The VXX at a recent price of $17.51 is closer to its January 16, 2020, $13.29 bottom.  The UVXY at a recent $11.44 is the nearest of the three to a its $10.58, January 16, 2020 bottom.

Investors and traders who have already not done so should establish a fraction of an initial position in the VXX or UVXY at current market prices and be prepared to utilize the Bear Trader’s alerts to average down.  Click button at bottom of page for a complimentary ____ day subscription to Bear Trader.

Views:

Leave a Comment

This site uses Akismet to reduce spam. Learn how your comment data is processed.