For a long time, from 2006 to 2017 (with the exception of a lone sell signal in 2014), this system didn’t generate any signals as $VIX traded at normal levels of 15 and above. But when $VIX dropped to extremely low levels this year, these sell signals began to appear again. We had previously written about this system in issues dated Jan 27th and July 16th. Simply stated, the system is this:
“IF $VXO closes below 10, and $VIXMO closes below 10.50, Sell the broad market.”
There are some historic instances where this signal preceded sharp market declines by as little as 5 trading days. The declines are typically short-term and do not affect the intermediate-term trend of the broad market.
In some cases, a series of these signals occurs, and the market doesn’t react until the series ends. Figure 5 shows the signals so far this year. Each red dot at the top of the chart indicates a day where the above condition existed at the close of trading.
Looking at the signals, from left to right on the chart…