One of the more reliable trading models in the past couple of years has flashed a buy signal. I have been watching the VIX/VXV ratio, as pioneered by Bill Luby, for some time. This investor sentiment indicator measures the term structure of the VIX Index. By my measure, when the ratio falls below 0.92, it has provided reasonably good long entry points in the past (see my previous post Waiting for a Santa Claus rally where I backtested this indicator).
The chart below shows the SPX in the top panel and the VIX/VXV in the bottom panel. The red dotted vertical are previous buy signals when the 3-day moving average of the VIX/VXV fell below the 0.92 mark.
As the NASDAQ 100 stages an upside breakout to new highs, the VIX/VXV is a confirmation of the underlying strength of the stock market.
If the past is any guide, this is a tradable rally that is likely to take the major averages higher, notwithstanding the worries about the Fed taper, the new Fed chair, the debt ceiling debate, etc.
Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. (“Qwest”). The opinions and any recommendations expressed in the blog are those of the author and do not reflect the opinions and recommendations of Qwest. Qwest reviews Mr. Hui’s blog to ensure it is connected with Mr. Hui’s obligation to deal fairly, honestly and in good faith with the blog’s readers.”
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