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The Volatility Signal That Works, but Not the Way You'd Expect
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ticker lesson
Breakdown
0:00lesson
VIX three-month spread analysis
- VIX three-month spread moved 1.09 points on September 17th
- Spread signals end of immediate volatility concern
- Market tried to rally after Fed meeting
- Current spread increased by 1.56 points today
- Historically large single-day move
1:48lesson
Historical performance of VIX spread
- 84 instances of 1.55+ point spread moves since 2007
- S&P 500 average decline of 0.42% one week later
- Median return positive 0.31%
- 3-month average return 3.11%
- Median return 4.12%
3:44lesson
Regime effects on VIX spread signal
- Financial crisis saw 22 signals with 3-month S&P decline of 9.67%
- Only 18.2% of signals led to positive returns
- Signal may measure normalization of volatility shocks
- Systemic deleveraging leads to repeated volatility spikes
- Curve restepening during crisis
5:35lesson
Post-2008 performance of VIX spread
- 33 signals from 2009-2019 with 3-month average return 4.4%
- 29 signals since 2020 with 3-month average return 11.4%
- Post-2010 signals show stronger returns
- Signal quality evolved over time
- Normalization after discrete shocks signals better returns
7:27lesson
Current market context and signal interpretation
- Current spread move may signal normalization
- Not a prediction of immediate rally
- Focus on 1-month and 3-month returns
- Regime change question critical
- Signal may indicate temporary stress
9:06lesson
Behavioral and event-driven aspects of VIX spread
- Large spread moves occur during investor discomfort
- Moves after discrete volatility events
- Midterm elections as a potential trigger
- Signal captures market's attempt to price in temporary stress
- Strong medium-term returns outside of crisis
10:58lesson
Signal strength and historical performance
- 63% of signals positive 3 months later historically
- 79% post-2008, 87.2% post-2012, 86.2% post-2020
- Signal strength increasing over time
- Consistency across modern regimes
- Signal needs context to avoid noise
12:41lesson
Market path and trading strategy
- Path to track: bullish engulfing bars
- Directionally neutral strategies working
- MNQ and ES showing potential for reversal
- Iron condors working on short side
- Opportunity for year-end rally post midterms
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