Monday, March 3, 2025

My SeekingAlpha Post Discussing the Vix Asset Allocation Model - Originally Published on 10/17/2014

This is a republication of a 10/17/2014 post that I published at Seekingalpha. Vix Asset Allocation Model | Seeking Alpha I formulated this Model in early 2007 after looking for the first time at a VIX chart.  

The last Stable Vix Pattern started to form in March 2023. 

All links to SA posts no longer work including the one above. The link will only take you to my SA page rather than the linked post. 

Since the VIX may soon form a Trigger Event, I decided to republish that old post here verbatim. 

CBOE Volatility Index (^VIX) - Yahoo Finance

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For several years now, I am been writing posts explaining my Vix Asset Allocation Model. I thought that it would be helpful to summarize that Model in an Instablog Post here at SeekingAlpha. I will be summarizing more lengthy discussions contained in my blog, with some liberal drag and drops mostly from the following posts.

Vix Asset Allocation Model Explained Simply

Use of the VIX as a Timing Model

VIX Chart from 2007: Alerts and Triggers Major Disruption of Cyclical Stable Bull VIX Pattern-August 2007 Trigger Event

VIX and S & P Compared 1990 to 1997

Vix Charts from 2004 2005 2006 Stable VIX Patterns Phase 1 and Phase 2

Parallels to VXO 1987-1988

This model is based on historical patterns and is obvious once an investor opens a long term VIX Chart and knows the stock market history between 1990 and now: VOLATILITY S&P 500 Index Chart

There are two Main Patterns:

1. Stable Vix Pattern: Continuous Movement in the Vix below 20, an investable bull market in stocks.

2. Unstable Vix Pattern: A Whipsaw Pattern Movement in the VIX at levels above 20, a far more riskier market for the individual investor, most likely what most people would call a bear market, or a Transition Phase from a bull to a bear market.

Each Main Pattern is divided into Two Phases:

Phase 1 STABLE VIX PATTERN: Mostly moving in a range from 15 to 20

Phase 2 STABLE VIX PATTERN: Mostly moving in a range of 10 to 15

Phase 1 Unstable Vix Pattern: Whipsaw Movement in the VIX mostly in the 20 to 30 range with temporary movements below 20 and above 30, mostly descriptive of an ongoing bear market with periodic rallies, and also descriptive of a Transition Phase from Bull to Bear.

Phase 2 Unstable Vix Pattern: Catastrophic Bear Market marked by a decisive break in a Phase 1 movement by a major burst into the 40s followed by even more elevated levels in the VIX.

Alert: An "Alert" happens when either an unusual break in a pre-existing pattern occurs, or there is some meandering by the VIX above a level considered to be significant under the model, without a decisive break into a bull or bear pattern characteristic of the Transition Phase or an unstable VIX pattern. An example of an alert is the decisive break in the Phase 2 bull market pattern in the VIX in 2/07. (see typical story from February 2007. The break was not a trigger event since the pattern broken was a stable bull market pattern Phase 2, and the Phase 1 pattern was still stable. An alert, however, should cause an investor to learn everything possible about the external events causing the alerts and to be considering possible major changes in asset allocation.

A Trigger Event Ushers in the Unstable Vix Pattern: A "Trigger" is a decisive break in the stable bull market pattern by a spike in volatility clearly outside the range tolerable for a Stable VIX pattern. Those spikes happened in two stages in 2007, in August and November. The trigger event requires a change in exposure to stocks. Timing of that change can vary, but LB (my Left Brain) has noted under all models covering the entire time period for which there is a volatility index that there would have been at least one, usually two, counter-moves back to below 20 that would be accompanied by a rise in the market average. This would afford an opportunity to lighten up at better prices than prevalent during the TRIGGER EVENT Phase. While this opportunity has happened in the past, there is certainly no guarantee that it will happen after the next Trigger Event or any other ones in the future.

Trigger Events:

April 1987 based on volatility index for the S & P 100 (VIX data starts in 1990): Parallels to VXO 1987-1988

October 1997: More on VIX AND ASSET ALLOCATION

August 2007: VIX Chart from 2007: Alerts and Triggers Major Disruption of Cyclical Stable Bull VIX Pattern

There have been three prior Trigger Events (data from Yahoo Finance):

August 2007 Trigger Event (multiple confirmations November 2007; January 2008; March 2008)
Aug 21, 2007 25.25
Aug 20, 2007 26.33
Aug 17, 2007 29.99
Aug 16, 2007 30.83
Aug 15, 2007 30.67
Aug 14, 2007 27.68
Aug 13, 2007 26.57
Aug 10, 2007 28.04
Aug 9, 2007 24.46

1987 Trigger Event (based on volatility for S & P 100-VXO-VIX Data Starts in 1990)

May 4 27.18
May 1 28.22
Ap 30 28.45
Ap 29 29.22
Ap 28 31.2
Ap 27 31.46
Ap 23 29.13
Ap 22 27.95
Ap 21 27.22
Ap 20 27.18
Ap 16 27.48
Ap 15 27.59
Ap 14 28.97

October 1997 Trigger Event (not resolved until later part of 2003, confirmed in October 1998)

Dec 30, 1997 24.38
Dec 29, 1997 26.79
Dec 26, 1997 29.27
Dec 24, 1997 30.27
Dec 23, 1997 29.86
Dec 22, 1997 28.56
Dec 19, 1997 29.18
Dec 18, 1997 27.19
Dec 17, 1997 26.33
Dec 16, 1997 26.11
Dec 15, 1997 27.37
Dec 12, 1997 27.92
Dec 11, 1997 27.63
Dec 10, 1997 24.55
Dec 9, 1997 23.36
Dec 8, 1997 23.22
Dec 5, 1997 22.65
Dec 4, 1997 23.84
Dec 3, 1997 23.92
Dec 2, 1997 25.66
Dec 1, 1997 26.01
Nov 28, 1997 27.43
Nov 26, 1997 28.95
Nov 25, 1997 28.95
Nov 24, 1997 29.80
Nov 21, 1997 26.65
Nov 20, 1997 27.32
Nov 19, 1997 29.93
Nov 18, 1997 31.58
Nov 14, 1997 33.66
Nov 13, 1997 36.64
Nov 12, 1997 37.84
Nov 11, 1997 36.38
Nov 10, 1997 36.63
Nov 7, 1997 36.27
Nov 6, 1997 32.57
Nov 5, 1997 32.18
Nov 4, 1997 32.24
Nov 3, 1997 32.09
Oct 31, 1997 35.09
Oct 30, 1997 38.20
Oct 29, 1997 33.75
Oct 28, 1997 31.22
Oct 27, 1997 31.12
Oct 24, 1997 23.17

The Unstable VIX Pattern is what happens after the Trigger Event. This pattern will be a dangerous and difficult market for the individual to navigate. There will generally be a lot of volatile up and down movement in stocks, with the end result being a long period of going nowhere. Going nowhere on a roller coaster is also the hallmark characteristic of a long term bear market, where the buy and hold investor in an S & P 500 Index would likely lose principal after adjusting for inflation even with dividends reinvested. I started to invest in the late 1960s. The annualized total return (dividends reinvested) of the S & P 500 from January 1966 through July 1982 was -1.813% Adjusted for Inflation and before taxes. That is an annualized loss. Dividends back then were taxed at the highest marginal ordinary income rate.

S&P 500 Return Calculator

The long term bear market can last for 15 or more years. The Vix Model is a shorter term signal and its signals can be given in long term structural bull and bear markets.

Phase 1 of the Unstable VIX Pattern will be market by repetitive movement in the VIX between 20 to 30, with temporary spurts to over 30 and below 20. A potentially more ominous pattern, Phase 2, would be a burst into the 40s that could lead to even further elevation into the 50s and beyond, which would be associated with catastrophic stock market losses similar to what happened after the Lehman failure in September 2008. There was a Phase 2 formation in late September 2008 that gave investors two days warning to get out. SEPTEMBER 2008: FORMATION OF THE DEADLY PHASE 2 OF THE UNSTABLE VIX PATTERN The operative word after a Phase 2 signal is caution.

The Unstable VIX Pattern, Phases 1 and 2, can last for a very long time. The one decision investor could just sit it out in five year treasury notes, rolling them over if necessary, and save themselves a lot of heartburn. Historically, it would be difficult for a skilled trader to navigate the Unstable VIX Pattern to beat the return of a five year treasury note.

The more adventuresome investor, such as myself, will play the volatility with the substantial cash raised after the First Trigger Event. Generally, this will be a mechanical trading strategy. During Phase 1, stocks are sold when the VIX moves below 20 and hedges are bought for the stocks that are kept.

When the VIX spikes toward 30 or over, stocks are bought again and the hedges are sold. This will work until Phase 2 comes around which may never happen. It did happen in September 2008. Then the investor following this path, which included me, would likely have no hedges, having sold them when the VIX spiked to the low 30s or high 20s, and would have added some stock positions back. Then, an adjustment has to be made when it becomes apparent that a Phase 2 of the Unstable VIX Pattern has formed, with the recognition that danger lurks at ever corner.

If I bought good companies when their price had fallen to reasonable levels for a long term holder, I can become a long term holder, start reinvesting the dividends, and potentially buy more shares during this catastrophic phase of the Unstable Vix Pattern with the cash stash. I could then wait for the movement to below 20 in the VIX and then decide what to do with the position added just prior to the Phase 2, Unstable VIX Pattern formation coming out of a long standing Phase 1 pattern. Trading and Asset Allocation in Stable and Unstable VIX PatternMore on VIX AND ASSET ALLOCATIONStable and Unstable VIX Patterns Impacting Changes in Allocation to Stocks, Bonds and Cash (November 2008 Post). In the case of my PEP shares, I was able to sell those shares before a significant price drop and then buy them back after the price fell over $20. Volatility, Catastrophic Event Formation, Asset Allocation Decision for Pepsi September 2008

When the catastrophic event formation occurred in September 2008, the Phase 1 Unstable Pattern had been in force since August 2007, and I could trade that pattern based on the movement in the VIX until Phase 2 emerged, and then there is no guidance from the model. The crap has hit the fan.

As shown in great detail in this blog, I carefully deployed cash flow to buy mostly income producing stocks that appeared to present good values during the September 2008 to March 2009 period, and this worked out just fine. It may not the next time. The Great Depression Part Two was avoided by the efforts of governments around the world.

Green Light: During an Unstable VIX Pattern, the VIX will periodically move below 20. A Stable VIX Pattern is not formed until there is continuous movement in the VIX below 20 for 3 months. Some minor movement above 20 is allowed without restarting the count.

Green Light Signals:

May 1991 and Terminated by Trigger Event October 1997: VIX and S & P Compared 1990 to 1997

January 2004 and Terminated by Trigger Event August 2007: More on VIX AND ASSET ALLOCATION

September 2012 - Stable Vix Pattern as of 9/26/12

DisclaimerI am not a financial advisor, but simply an individual investor who has been managing my own money since I was a teenager. In this post, I am acting solely as a financial journalist focusing on my own investments. The information contained in this post is not intended to be a complete description or summary of all available data relevant to making an investment decision. Instead, I am merely expressing some of the reasons underlying the purchase or sale of securities. Nothing in this post is intended to constitute investment or legal advice or a recommendation to buy or to sell. All investors need to perform their own due diligence before making any financial decision which requires at a minimum reading original source material available at the SEC and elsewhere. A failure to perform due diligence only increases what I call "error creep". Stocks, Bonds & Politics: ERROR CREEP and the INVESTING PROCESS Each investor needs to assess a potential investment taking into account their personal risk tolerances, goals, and situational risks. I can only make that kind of assessment for myself and my family members.      

10 comments:

  1. Thanks for reposting this. I backtested when first seeing your posts about it. It held up in my backtesting.

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  2. Many investors were encouraged last Friday that the S&P 500 index bounced off its 200 day SMA line.

    Using a 1 year Yahoo Finance chart, the SMA line was at 5,733.1.

    In pre-market trading today (3/10), this index is at 5,694.5 as of 7:50 A.M. CDT. A significant breach of that line may result in downside selling pressure.

    A Trigger Event in the VIX Model may form soon that ushers in an Unstable Vix Pattern, a more dicey environment for stock investors.

    My stock allocation is less than 10% of my total brokerage assets. So even if a consider to reduce signal is sent by the VIX Model, and confirmed by a 5% decline below the S&P 500 200 day SMA, I am not likely to do anything since I am already in my bunker waiting for incoming.

    The Vix Model is based on past historical patterns. One of those patterns is that there is a Recovery Period after a Trigger Event where the VIX returns briefly to below 20 movement and the S&P 500 index is in a rally mode (as was the case after the August 2007 Trigger Event with the Recovery Period lasting into October 2007). The Recovery Period, when it happens, would provide a better opportunity to lighten up than selling during the Trigger Event when stocks are in a free fall.

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  3. I was just wondering this stuff. Are we on day 6 of Vix above 20?

    Like usual I didn't chase (sold) on the way down which would have been helpful if I had. But now I'll wait for a recovery event. What's complicating it is that the recovery event is based on investor optimism about some negative event. The thing that's the negative event still is talking, so I'm not sure how likely a recovery event is.

    I read but wanted to reread the other post about investment options... A lot to process and think about!

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    Replies
    1. Land: There are no days yet in the Trigger Event count. The days have to be with VIX closes at or above 25. Today may be the first day of the count. The VIX is currently at 26.4.

      The reason for requiring high closes over several days is based on history and was designed to lessen the chance of a false signal.

      When I first opened a long term VIX chart early in 2007, the patterns jumped off the page immediately.

      Some signals will be stronger than others. The August 2007 Trigger Event had multiple Confirmation Events before the bottom fell out.

      The Trigger Event before the 1987 crash had more days in the count than the one in August 2007. For 1987, I had to use the volatility index for the S&P 100 since the VIX data starts in 1990. The same pattern held up using the S&P 100 volatility data.

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  4. Cboe Volatility Index
    Close at 27.86 + 4.49 +19.21%
    https://www.marketwatch.com/investing/index/vix

    Day 1 - Trigger Event Count

    I did do some selling into an early morning rally where the stock was up 2% or more. Most of my early morning stock gains faded as the market dived into the close. Nothing much will escape this kind of downturn but I did still have several bond like stocks remain in positive territory.

    As expected, the decline accelerated when it became apparent to traders that the S&P 500 was not going to rally above its 200 day SMA line.

    S&P 500 Index
    5,614.56 -155.64 -2.70%
    200 Day SMA Line Break at 5734.63 (using a 1 year Yahoo Finance chart)
    50 Day SMA Line at 5,917.12, pierced to the downside with gusto on 2/24/25.


    ReplyDelete
  5. Thanks for the update!

    I haven't done any buying or selling. My account is definitely suffering. But hopefully since I've been waiting for an opportunity to buy, this will lead to one without actually leading to a long-term recession.

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  6. Land: I will need more economic data before I can reach an opinion on whether a recession is on the near horizon.

    Tariffs will cause major price spikes in products that are already expensive and that will have a substantial negative impact on revenues for several major economic sectors including autos and construction.

    The 25% tariffs on all aluminum and steel imports, which will start tomorrow, will have a significant inflationary impact on heavy domestic users of those metals. Those tariffs will also allow domestic producers to significantly raise prices as well. This is what actually has happened in the past.

    Trump has temporarily delayed his 25% tariff taxes on imports from Mexico and Canada for products that are entitled to no tariff treatment under the trade treaty that he negotiated, but that expires on 4/2. Those products include car parts used in U.S. manufacturing as well as cars and trucks sold to U.S. customers. The end result of all of these tariffs including the ones taking effect tomorrow will be about a $6,000 to $8,000 price increase in new vehicle sales, but that will take a few months to show up. When the price increases are factored into newly manufactured vehicles, this will result in fewer vehicle sales that will lead to layoffs in the auto industry, both the major car companies and the host of companies that supply products to them.

    In several recent VIX spike periods, I have added to my stock positions but I am in a wait and see mode now since there is at least a possibility that a major recession will be caused by Trump and his party that will lead to much lower equity prices.

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  7. It looks like there may be a rally. I'm waiting to see. So is everybody else.

    I'm going to sell into it.

    The tariff announcements are causing distress for good reason. Even if he rolls it back, I don't know what's next.

    The lawsuit won by employees, requiring several government agencies to rehire what they just fired, may have been the trigger for Friday's rally. That should help the economy better than firing them. Hard to say If this will be the final word or everyone will get fired again under some other excuse.

    ReplyDelete
    Replies
    1. Land: I view it as unlikely that the rally last Friday (3/14/25) was related to any external event happening that day.

      The rally was probably just a technical rebound from short term oversold conditions. The S&P 500 index closed at 5,770.2 on Friday 3/7 and at 5,638.54 last Friday or down -2.28% for the week after the +2.13% rally. The recent high was at 6,147.43 on 2/19/25.

      I read the judge’s opinion about the firings and agree that Trump fired them unlawfully based on the legal requirements discussed in the opinion. He deliberately ignored all of those requirements in firing the federal employees.

      Trump has repeatedly violated laws on other matters as well, including impounding funds authorized by congress by executive order and even eliminating entire programs by executive fiat (e.g. refusal to follow The Impoundment Control Act of 1974). All of Trump’s law violations to date are consistent with the exercise of unrestrained dictatorial powers.

      Trump is testing a legal theory that he has absolute control over the Executive branch and can do whatever he wants to do as President, without adhering to any law, including those passed by Congress and signed into law by prior Presidents, or regulation that restrains even in the slightest way that power.

      Trump understands that the 6 Republican Justices, who are the most supportive Supreme Court in U.S. history to growing the uncheckable powers of the Imperial Presidency, have unleashed him, and there is no meaningful restraint left until the next Presidential election.

      Delete