EXCERPT
You may have noticed that the CBOE Volatility Index, the VIX, is now part of Portfolio123 and accessible through the GetSeries function. Not only is this a useful index in and of itself, as some users are already seeing, but it can also be used to help you decide how to use other tools. FULL ARTICLE.
BY: Marc Gerstein
CATEGORY: What’s Working
Marc:
Interesting use of VIX and #bench using Eval. Also interesting use of the screener to test benchmarks. Thanks for the idea.
I think you are missing a figure or the numbers are off. Figure 1 should track SPY and be in the market all the time, I think.
I am not sure about this. Running your screen, I get a buy on screen date 5/1, price start = 5/3 (Monday), price end = 5/10 (next Monday) with 1 position. I think you would really get a signal on the 5/8 (Saturday) rebalance, go bearish and sell out on 5/10. Hope I am wrong. The week made a big difference, about -7%.
Glenn
The images have been corrected. So, too, has the text.
The model actually went bearish for the first time in 2010 on May 7, went bullish again for four days (5/11-5/14) and has been bearish since. On a weekly re-balancing, May 8 would be the date to cite. since the 4/26 peak, the strategy fell 4.9% versus 11.7% for the market.
Link to the full article seems to be broken…
Not sure what happened, but in any case, it’s working now.
Nice work, Marc. Thanks for posting this.
I will be sure to mention this article in an upcoming post on my blog.
Cheers,
-Bill
All:
For those trying to put the VIX to work, I found that looking at the VIX daily and comparing the current VIX to its 10 day moving average gives pretty good exit signals since 1/08, if you look for the difference to be greater than 20%. If the Vix is up 20% in a given day from its 10 day average (SMA), something bad is happening or likely to happen, in the SP500.
Let’s say you exited at 4/21/2010 with the above, does anyone know how you would tell the screen or a sim that you are in cash and it is now time to check an alternative formula for entry? Maybe the eval function, but what do you test to determine cash?
Glenn
How do you write that Glenn- I’ve been coming false on attempts?
Does it beat inserting the following as a buy criteria?
SMA(10,0,GetSeries(“$VIX”)) <1.15*SMA(50,0,GetSeries(“$VIX”)) & close(0,GetSeries(“$VIX”))<32
Isaac
Great use of the VIX.
Quite similar to this example, I am interested in using measures of overall market valuation to determine when to switch between shorter and longer moving-average comparisons to make buy/sell decisions. Examples would be Hussman’s Peak PE Ratio, Shiller’s Cyclically Adjusted Price Earning Ratio or the measure of total market cap relative to the US GNP, as espoused by Buffett. I was curious if the relevant macro data was available in Portfolio123 to perform any of these comparisons and/or if any of these methods have ever been used, or discussed in the Forum?
Issac:
Formula - Close(0,GetSeries(“$VIX”)) / sma(10,0,GetSeries(“$VIX”)) > 1.20 - If you think about it, this is really a volatility measure of a volatility index.
We are all looking for a rule that is either/ or - like VIX <= 30 or maybe Benchclose(0) > sma(50,#bench). This means you are in the market if VIX is 30 or under and out over 30; in if Benchclose(0) is over the SP500 SMA(50), out if not. I think things are more complicated, which Marc suggested with the use of two rules and a switch.
Here is my thinking. Maybe others have ideas. You want a good rule to tell you (1) when to get out, (2) when to stay out, and (3) when to re-enter. For the first (1) you want an early warning, before the decline. I think the formula above does a pretty good job for (1) this year. Run a daily screen for this year and the blue bars in the chart give you pretty good exits. Look at the detail and you see that the dates for first occurrences are 1/21, and 4/27 which would have been good exit points. If you look at the VIX and the SP500 daily charts these look like good early warnings of downturns.
For re-entry (3) you want to pick the bottom and not miss the recovery. Hard to do. A consistent reversal is a pretty good signal. If you use a re-entry rule in the screen like - Benchclose(0) / SMA(10,0,#Bench) > 1.02 - for the re-entry, it would signal a re-entry on 2/17 for the 1/21 exit; no re-entry for the current downturn, yet.
So, how do you use this in a sim or screener? You need something that tells the screen that you triggered the exit rule (1), and now wait (2) for the next occurrence of (3). I can’t think of a way to do this but others may have ideas. This may be something that is best done by looking at charts and making subjective decisions. Something you can’t really quantify and backtest but you can see in the historical charts.
Glenn
Hi,
Interesting to see reference to volatility of volatility. I was just reading a paper on this. Summary and link here: Exploiting the Predictability of Volatility - CXO Advisory
Much of the math in the paper is beyond me, but the net of it is that contrary to popular wisdom, leveraged ETF’s may be suitable to hold long term depending on current volatility. To know what volatility is appropriate can be mathematically determined. Also, since (apparently) future volatility is relatively predictable, then the appropriate leverage for tomorrow can be mathematically calculated.
Again, I don’t follow all the math but it seems to me that the VIX is a prediction of future volatility. So following the premise in the paper the VIX could be used to determine the appropriate portfolio leverage (or help to determine the appropriate hedge). After all, if the market volatility has doubled or tripled, does it make sense to have the same market exposure? This is not something that can be implemented today but perhaps in the future the VIX could be used in determining the level of the hedge.
One issue I see with this if hedging with options is that if the VIX goes up, this says that you should increase your hedge, but now options are more expensive.
Don