Just a quick note to share something I've been looking at.
I'm sure this has been noted elsewhere but I thought it was interesting in reference to the research on selling extreme indicators such as the Williams Vix Fix. The research I've made on this so far is based on holding for one day only i.e. short term moves.
I believe VIX or VIX spikes or indeed many mean reversion indicators tap into a common stock market pattern whereby the biggest daily gains happen during down trends.
Naturally this is a function of the greater volatility of these periods, but I was still struck by the pattern.
I performed a quick study on the FTSE 100 and S&P 500, looking at the top daily gains based on the index closing values.
For both the FTSE 100 and the S&P 500, going back to 1987, all the top 10 biggest daily gains have occurred when the previous day's close was below the 200 period moving average.
Here's the FTSE top 10:
The S&P500 shows a similar pattern, but with more days in the top 25 that were above the 200 MA.
If you look at the top 10 and top 25 biggest losing days, you'll also find that all but two of these occur when the market is below its 200 period moving average.
So values below the 200 MA are certainly more volatile and offer more danger in the form of big losing days.
However there is another danger during these times: That investors pull their money out and miss the very large gains that can occur during the depths of such periods.
This is where mean reversion/ capitulation indicators appear to come into their own, perhaps showing a longer term investor when not to cash in his chips (maybe just before a big rally day) or the short term nimble trader high risk/ high reward buying points.