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Multiple divergences for S&P analyzed

Today was an interesting day in the stock market. The S&P 500 closed positive while the most correlated indicators aside from other equity indexes closed strongly negative.  This includes Treasuries (up), high yield/corporate bond (down), and Volatility (down). These are all the opposite results of the norm, at least for the last several years. Since this seems to make the move in the S&P suspect in terms of at least the immediate term, I ran a query in my equity history database. I used the cube with the grouping function to get a rollup of each grouping and the entire selection. 

Below is the query:


Although I have history of the S&P back to 1950, some of the other instruments only go back to 1990, so the analysis is limited to then. 152 instances were found that met the condition over a 25 year period, so this only has only happened on average about 6 times per year.  Out of 152 instances, VIX was up the next day almost 1 1/2 times as often (61% versus 39%) based  on 93 out of 152 instances positive for the test.  Along with that, the average change on the days that the VIX went up was negatively much stronger than on the VIX down days. The up days occur most often during tumultuous markets such as 2000 and 2007. Below are the detailed results.


Are 152 instances enough data points to justify making a trading decision based on the information? How strong is the correlation when allowing for the confidence factor associated with this many instances? I’m still researching how to quantify that. It is interesting that so many odd coincidences and correlations that are pointed out in the stock market fall apart when actually examining the statistical confidence aspects. However, this one seems stronger than many given the significant difference with this many instances.

Bottom line is that today was probably ( 61% likely) a good day to buy VIX calls and short-sell the SPX – at least if you’re trying to make a quick turn-around profit. Note, that there may be longer-term implications, especially given the preponderance of instances that occurred during bear market periods, but I did not test that.

The usual disclaimer applies: I.e. I am not a professional investment advisor, short-selling and options involves significant risks including complete and total financial ruin, talk to your personal financial counselor, etc, etc, etc.


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