Wednesday, June 21, 2006

Inside Day With Less Fear: What It Means

On Tuesday we saw yet another inside day, with a sizable reduction in the closing VIX. Overall, the short-term outlook following inside days is not bullish. Since March, 2003 (N = 830 trading days), we've had 112 inside days in the S&P 500 (SPY). Two days later, the market averaged a flat performance (52 up, 60 down), considerably worse than the average two-day gain of .12% (394 up, 324 down) for the remainder of the sample.

When the inside day has been accompanied by a large drop in the VIX (N = 56), the next two days in SPY have averaged a loss of -.03% (22 up, 34 down). Relative strength in the VIX (N = 56) during an inside day has been associated with an average two-day gain of .03% (30 up, 26 down).

In short, inside days seem to provide little edge for the bulls, especially when they are accompanied by a reduction in fear among options participants.