Should you start buying? Here’s what history says…
The market has continued
to sell off despite the oversold nature. This hints that the market
may not be oscillating in its normal way. Anyone who has studied Larry Connors
CVR signals understands that by looking at VIX levels as compared to their
short-term moving averages, entries may be timed with a great degree of
consistency. But what happens when the VIX get stretched upwards (indicating
fear) and the market continues to sell off? It means the market could be in the
midst of a runaway selloff. To see what I mean, consider the following tests:
Test 1
Buy the S&P 500 each time the VIX closes 12%
above its 10 day moving average. (Do not make additional buys if you are already
in a trade).
Sell 5 days later.
This simple strategy would have been successful
about 60% of the time over the test period (1991-present). The net gains over
the period would have been more than double the net losses for a profit factor
of 2.16.
Test 2
Buy the S&P 500 only when the VIX manages to
close at least 12% above its 10-day moving average for six days in a row. (It
appears this will happen today as I write this at 3pm). Again, do not make
additional buys if you are already in a trade.
Sell 5 days later.
You might think that by waiting to buy into an
oversold and fear-filled market like this, your profits would be even greater.
Not so. In fact, the results were terrible. Using this strategy over the last 15
years, you would have made money only 3 of the 9 times it triggered. And your
net losses would have been 3.5 times larger than your net gains!
This indicates that when an oversold market is
unable to bounce, it could really be in trouble. This is exactly the scenario
that is unfolding currently. It is not a scenario where you want to be loading
the boat on the long side. Be careful out there.
Best of luck with your trading,
Rob
Rob Hanna is the principal of a money
management firm located in Massachusetts. He has spent the last several years
developing and refining methods for trading in stocks across multiple time
frames. He selects stocks using both fundamental and technical criteria, and
then trades them using technical analysis techniques.