Down goes the Dow

Also, that long 170 day stretch started on 15 Sept 2008, and VIX first exceeded 36 two days later. It averaged > 60 throughout October 2008.

If you bought a SP500 index on 1 Oct 08 (VIX ~ 39.8), 1, 2 and 5-year change would be -11.7%, -2.1% and +42.7%, compared with overall averages for the market of +7.7%, +15.4% and +43.3%. In other words, using VIX ~ 40 as a signal on 1 October would have given underperformance relative to market averages for up to 5 years.

By contrast, if you stuck to your guns and white-knuckled it to VIX ~ 59.9 at the end of October, you would see 1 months, 6 months, and 1, 2 and 5-year change of -15.7%, -5.1%, +7.9%, +23.7% and +82.8%. The 1-year return was about average and the 2-yr and 5-yr returns significantly better than average. Shorter term returns were still very poor (well below the average 1 and 6 month change of +0.6% and +3.8%).

The moral of this story is that there are times when "buying the VIX" may take a long time and a lot of patience to reward the investor.

Yep, no doubt. Mind you, there would be a marked difference between buying early in the development of that dip versus later. And the VIX is an imperfect indicator, as it tells us very little about when the bottom is really approaching.

Beating a dead horse here, I know, but I think, like Igy, there's more room to drop, maybe a lot more, and the path to get there will be chaotic as completely unpredictable world events unfold, I think.

well it's all odds.

2008 was an outlier. As far as I know virtually every other instance of buying at a VIX in the mid 30s was profitable a year later. Maybe absolutely every other example, I'm not sure. Probably best not to put too much weight on 2008-9, given the many other examples showing strong price appreciation post-VIX spike.

But anything can happen.

True dat...

That said, like in roulette, the potential for sudden ruin (let's say portfolio declining 80%) is always present (if perhaps very low probability), whereas the potential for the opposite (portfolio grow four-fold) in the same short time doesn't exist. By contrast, unlike with roulette, long-term negative gains are very rare (for most indices or well-balanced portfolios), whereas the chance for significant long-term growth is always present.

The thing is, most of us don't have the psychological fortitude to embrace long-term odds in the face of short-term events, odds be damned.

jobs number is bloody goldilocks.

huge new jobs number, unemployment rate falls to 3.8%

BUT

zero wage inflation. Which could help keep interest rates down.

Perfection. For stocks anyway. Lots of people with new paychecks to spend.

I've just checked that. Of 294 days since 1990 to ~ 2020 where I have +1-year VIX data and VIX was > 35, there were 24 days (8.2%) that underperformed relative to overall average of 7.7% +1 year change, and of those 24 days, 20 had negative 1-year returns with an overall average decline of -14.3%, and a biggest decline of -26.9% (starting 8 Oct 2008).

Of course, the overall average 1-year change for all 294 days with VIX > 35 was +25.2%, well above the average of +7.7%.

So no doubt, there is a good chance of making good 1-year gains if buying at VIX > 35. But buried in that "good chance" is a not-inconsequential chance of making very bad returns.

You pays your money, you takes your chances... :-)

Also, if we look at post-VIX > 35 change over 5 years, we get an overall average of +84.9%, about double the average change, but 53 of 290 days (18.3%) at less than the average, and 14 days (almost 5%) with negative 5-year returns.

5% change of negative 5-year returns... ouch!

Of course, if I'm to be honest and fair with my statistics (my father in law, may he rest in peace, used to say, "figures never lie, but liars can figure"), on any given random day since 1927 there was a ~ 20% chance of negative 5-year returns (increasing to 28% if I look at 1990-onward). So 5% chance, based on buying at VIX > 35, is quite a bit better than average.

I believe a more appropriate comparison would be buying the dip in August of 2000 months after the high of March 2000. The investor was not rewarded for 15 years. It can happen here, and is possibly likely.

That is the worst possible outcome. Not impossible, but surely unlikely. I'm not betting against it though... I'm a scaredy-cat. :-)

On the NASDAQ only, which at the time was basically just a hype index.

Every other index was pretty much unaffected. No one considers the NASDAQ to be the broad market, which is the SP500

OK millennial. :-)

Check your facts. Have a look at SP500 a second time....

k.

SP500 in 2000 -> 2015, about 50% gain depending on where you measure.

Let me check again.

Yup, still there. I'll do a fourth time just to make sure.

Oh wow it's actually different this time....

jk, it's exactly the same

Igy wrote August 2000, five months after the March 2000 peak.

Checking back, the index daily close ranged from 1438 to 1517 in August 2000. Apart from brief blips before the next crash, the index did not sustain higher values until around 2013, give or take, and was below those levels for >> 99% of the time between.

Liars can figure... :-)

I'm not calling you a liar BTW. We are trading statistics without context, is all.

Literally, the exact quote - "The investor was not rewarded for 15 years." Which is true... for the NASDAQ only. We're talking about buying the dip on the broad market during the recession caused by the dot com bust, because no one, even to this day, considers the NASDAQ "the broad market."

Doesn't even count re-invested dividends. And DJIA is up even more over that period of time by the way.

lmk if you want me to check a 5th time though

OK, we are splitting hairs and cherry picking. Igy either mistyped or erred when he wrote 15 years. To me that's nitpicking, not unlike the cherry picking he gets accused of.

The fact remains that if an investor had waited five months from the March 2000 peak and decided the markets had reached a good dip that was ripe for investment that August, and then went all in, they would see horrible returns for > 10 years.

It's easy to look at that and say, sure, but the long-term buy and hold investor who stayed the course for 15 years would see +50% gains! But an investor should be expecting an average of +200% gains over 15 years, not a paltry 50%.

Again, we are trading statistics without context, but if you dismiss Igy's point you are revealing an important blind spot. I think you are too smart to not actually see this point.

2s/10s yield curve down to 33 bps and plunging.

an inversion would be very bad. Does that affect the Fed's actions? Maybe a factor.

fred.stlouisfed.org

10-Year Treasury Constant Maturity Minus 2-Year Treasury Constant Maturity

10-Year Treasury Constant Maturity Minus 2-Year Treasury Constant Maturity

Link:fred.stlouisfed.org/series/T10Y2Y

the other point is that few of us have 100% stocks...a 60/40 portfolio recovered from that crash in just 2-3 years.