Follow Up to the VIX-based RSI(2) Strategy

23Apr13

This is a follow up to a strategy presented by STS in Profit by Combining RSI and VIX, and originally proposed by Larry Connors in Short Term Trading Strategies that Work.

The strategy applies the popular short-term indicator RSI(2) to the VIX index and uses the result to time the S&P 500.

20130423.01
[logarithmically-scaled, growth of $1]

The graph above shows the S&P 500 (grey, dividend-adjusted) versus strategy results (red) since 04/1987.

Strategy rules: Buy the S&P 500 (SPY) at the close when RSI(2) of the VIX will close above 90 and the S&P 500 is above its 200-day moving average. Sell when RSI(2) of the VIX will close below 30.

Note that I’ve ignored STS’s ATR-based position sizing and assumed 100% of the portfolio was invested on each trade. Also note that because the VIX is strongly negatively correlated with the S&P 500, this is a short-term mean-reversion strategy (i.e. buying when VIX is high = buying when the S&P 500 is low).

Geek notes: S&P 500 results are dividend-adjusted (VFINX prior to 01/1993 and SPY thereafter). VXO is used in place of VIX prior to 01/1990. Return on cash = half the nearest 13-week UST. Transaction costs/slippage ignored.

Numbers for the number lovers…

20130423.02

Note that in the stats above I also included a variation of the strategy without the 200-day moving average requirement (middle column).

I haven’t shown it for the sake of brevity, but even based on a cursory examination, an argument could be made that the additional filter isn’t doing much to benefit the strategy.

Same test, but with 200-day MA requirement removed:

20130423.03
[logarithmically-scaled, growth of $1]

As a standalone strategy, both variations have failed to be big return drivers; the strategy is just too selective in its trades (time in market = 15% of all days). The strategy would need to be coupled with other ideas to increase exposure to the market.

But when the strategy has signaled a trade, those trades have been much more productive than the average day (note daily return stats).

One fly in the ointment: the strategy has lost steam in recent years.

To illustrate, below is the rolling 3-year daily volatility-adjusted return (average return / standard deviation of returns) of the strategy when invested (red) versus buy & hold (grey).

Note how the strategy is on the low end of its historical performance and hovering around even with buy & hold. Obviously, anyone considering this strategy would need to keep a careful eye on this.

20130423.04

Big ups to STS for resurrecting this strategy from Larry Connors. Note that this wasn’t meant to be an exhaustive analysis, just keeping the ball bouncing through the blogosphere.

Be sure to check out STS’s post for another angle of attack looking at various buy & sell thresholds.

Happy Trading,
ms

. . . . .

To stay up to date with what’s happening at the MarketSci Blog, we recommend subscribing to our RSS Feed or Email Feed.



3 Responses to “Follow Up to the VIX-based RSI(2) Strategy”

  1. Hm, why would you use VIX as a a measure of volatility of SPY ?
    Why not go directly to SPY volatility ? ATR or anything else ?
    Why would you need a proxy for volatility especially such unreliable as VIX ?

    • 2 MarketSci

      Because there’s a wealth of information that can be gleamed from implied (as opposed to historical) volatility. That’s not necessarily true in this context, but it’s most definitely true in general. michael


  1. 1 What I’m Reading This Weekend | System Trading with Woodshedder

Leave a Reply

Please log in using one of these methods to post your comment:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s