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On June 29th, the VIX fell by about 17.5% from its previous close. Historically, the next 10 trading days will find the S&P 500 trading higher after a larger than 10% drop in volatility.
As promised, here is the result of this latest signal:
The green circle shows the day after the volatility crush - 1272.86. And the red line is the close after 10 trading days - 1236.20. That is a drop of more than 36 points.
So this signal was another of the few times when this historical precedence did not hold. Does this mean that this whole concept is bunk and deserving to be thrown on the pile of signals that are failing us right now… to be forgotten?
In hindsight it is easy to make such judgement calls. But without it, the most intelligent method is to continue using the tools that have worked in the past. Until they don’t anymore.
In a cyclical bull market, a volatility crush means something totally different than in a cyclical bear market. So if we are indeed changing from one to the other this reliable indicator can seem to be less so.
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