When The CBI Spikes But The VXO Doesn’t

The CBI hit 9 today and is reaching elite territory. The VXO is not near an extreme. The VXO (and/or VIX) are getting a lot of discussion lately as traders fret that a market bounce won’t happen until after a VIX spike does. It remains my contention that extreme sentiment measures like the VIX and Put/Call Ratios are “nice to haves”, not “need to haves”.

Tonight I decided to look at CBI readings of 8 or higher broken out by those times the VIX was stretched vs. those times it wasn’t. Rules for entry for the first test are as follows: 1) CBI closes greater than or equal to 8. 2) CBI closes higher than yesterday and 3) The VXO is greater than 10% above its 10-day moving average. If all three are met $100,000 worth of SPX is bought at the close. It is sold when the CBI returns to 3 or less. Results below:

Keeping the first two criteria the same and changing #3 to “VXO is LESS than 10% above its 10-day moving average” would provide the following results:

See the big difference? Neither do I. The results are almost identical.

But today the VXO wasn’t near 10% above its 10ma. In fact it was less than 5% above its 10-day MA. Below are the results when changing requirement #3 to “VXO is less than 5% above its 10-day moving average”.

It appears to me the odds favor a bouce soon with or without a higher VIX.