S&P 500 At Volatility Extremes

As a follow up to my last post looking at volatility extremes on the FTSE as measure by the Williams Vix Fix, here's how the S&P 500 measures up:

I used the Williams Vix Fix (WVF) as a Vix type volatility applied to the S&P 500. I then performed a 30 period percent rank of the WVF. I then looked at what would happen if you were to buy the next day after a particular level is reached and stay out of the market otherwise.

Firstly I looked at high volatility measures, when the WVF had a percent rank of 0.75 or above. You can see the results below:

S&P 500

Data is on the S&P 500 back to 2000. No costs, slippage of dividends. I'm just looking for trends here.

The results are similar to the FTSE 100 with buying at volatility extremes working out to be a profitable strategy, albeit with increased volatility.

However buying only during extremely quiet periods has been an poor strategy. Sure its less volatile, but its also less profitable.

 

Here's a comparison of two extremes:

Buying only when the WVF PR was above 0.95.

Sorry I've just noticed the graphs still say FTSE 100. They are not, they refer to the S&P 500 (or Russell, or Nasdaq later)

Buying only when the WVF PR was below 0.05.

Russel 2000

There is a similar effect on the Russell 2000. The improvement in performance at high volatility extremes is less marked, but the impact of buying at low volatility appears to be more consistent (i.e. worse).

Here's the results of buying the Russell 2000 any time the WVF Percent Rank dropped below 0.2. 

Sorry I've just noticed the graphs still say FTSE 100. They are not, they refer to the Russell 2000

Nasdaq 100

There is also a very similar effect on the Nadaq 100, though this is the opposite of the Russell 2000 with the benefit of buying at high volatility extremes increasing and the losses at low volatility extremes decreasing. Interestingly, buying the Nasdaq at volatility extremes actually decreased the average standard deviation of each trade.

Mean Reversion effect?

Is this another example of mean reversion applicable to just the last decade?

The effect is stronger now, but there was still some evidence of its impact between 1990 and 2000. The near relentless bull market during this period no doubt nullified the effect somewhat.

Here's the same test on the SPX from 1990 to 2000.

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