The VIX is Your FIX: a Flexible Strategy to Timing the Stock Market

Abstract

We use the VIX and basic trading behavior to time entry and exit from the market. Our strategy captures 89% of the bottom and 91% from the top (you miss only 11% and 9% from the peak point, respectively). We lay our strategy down in six acts. Act I: the daily average return in the stock market is negative when VIX above 23; then sell if VIX in the way up and exceeds this threshold. Act II: the average daily return during the journey of rising VIX above 23 is -0.6%. Act III: the average daily return during the journey of declining from the peak 0.56%. Act IV: exit (enter) when you have back-to-back two downs (up) days with overall 6% or more. Act V: watch the Federal Reserve rates; exit when rates increase (decrease) during expansion (contraction). Act VII: do not trust oil prices as a predictor for future economic growth since the supply side of oil is highly politicized between OPEC and OPEC+. Collectively: when it comes to transition between bear to bull markets or vice versa, the VIX is your FIX.

Keywords: Bull and Bear Market, Entry and Exit, Timing the Stock Market; Recession and Expansion

JEL Classification: G12