JP Morgan VIX Buy Signal Trading Strategy- (Backtest, Performance, Setup Analysis)

Some signals and indicators try to predict regime changes or future returns in the stock market. One of the most famous is the Breakaway Momentum indicator from Walter Deemer. Another one is the JP Morgan VIX Buy signal.

The JP Morgan VIX Buy signal is a well-known pattern developed by JPMorgan strategists, led by Mislav Matejka, to trade the markets more effectively. The bank likes to talk about how effective it is, but today, we decided to put it to the test.

In this article, we will see what the JP Morgan VIX buy signal is, how it performs, and backtest a trading strategy based on this signal.

What is the JP Morgan VIX Buy Signal?

The JP Morgan VIX buy signal is a popular bullish indicator developed by the bank’s strategists. The signal is triggered when the CBOE Volatility Index (VIX) rises by over 50% of its 1-month moving average. The signal has been triggered 27 times since 1993(per our backtest).

What is attractive about this signal is that, according to JP Morgan, it has proven 100% accurate outside of recessions. Here is a plot showing the signals and the corresponding SPY level:

But how does the SPY perform after the signal is triggered? Is it 100% accurate?

Performance of the JP Morgan VIX Buy Signal

Based on our backtest, the strategy isn’t 100% accurate outside of recessions. For example, the signal was last flashed on Jan 25, 2022, but the following six-month performance was -7%. And last time we checked there wasn’t a recession in 2022, just a bear market.

Here is the average performance per timeframe:

However, the average returns are not bad, so we created a little trading strategy and backtest it.

 JP Morgan VIX Buy Signal – trading rules

The trading rules of the strategy are pretty simple:

Trading Rules

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• We buy and hold the SPY for six months when the JP Morgan VIX buy signal is triggered
• We hold cash during the rest of the time

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 JP Morgan VIX Buy Signal – backtest

As we mentioned, we are going to use the ETF SPY. The data is adjusted for dividends and splits. Here is the equity curve:

The returns look okay. Here are some metrics and statistics about the performance:

• CAGR is 1.91% (buy and hold is 10%)
• Time spent in the market is 30.52%
• Risk-adjusted returns are 6.25% (CAGR divided by time spent in the market)
• Maximum drawdown is 46.69% (55.19%)

As you can see, the strategy is not very good. The only thing the strategy is better than buying and holding is the maximum drawdown, but the CAGR is so low it’s unnecessary.

 JP Morgan VIX Buy Signal – conclusion

To sum up, today we learned that the JP Morgan VIX buy signal may not be as profitable as some people think. Although it has average positive returns, our backtest strategy was not very profitable. 

Disclaimer

Quantified Strategies (SIA Lofjord) is not an investment advisor. The content and information provided are educational and should not be treated as financial advisory services or investment advice. Trading and investment in securities involve substantial risk of loss and is not recommended for anyone that is not a trained trader or investor – it shall be conducted at your own risk. It is recommended that you never risk more than you are willing to lose. Leverage can lead to substantial losses. Any use of leverage, margin, or shorting is at your discretion. Quantified Strategies (SIA Lofjord) is not responsible for any losses that occur as a result of its content and information.

Hypothetical or simulated performance results have certain limitations. Unlike an actual performance record, simulated results do not represent actual trading. Also, Since the trades have not been executed, the results may have under or overcompensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated trading programs, in general, are also subject to the fact that they are designed with the benefit of hindsight. No representations are made that any account will or is likely to achieve profit or losses similar to those shown.

FAQ:

What is the JP Morgan VIX Buy Signal?

The JP Morgan VIX Buy Signal is a bullish indicator developed by JPMorgan strategists. It triggers when the CBOE Volatility Index (VIX) rises by over 50% of its 1-month moving average. The signal is known for its effectiveness, but its performance can vary.

How is the JP Morgan VIX Buy Signal triggered?

The signal is triggered when the CBOE Volatility Index (VIX) rises by more than 50% of its 1-month moving average. This criterion aims to identify potential market turning points and guide trading decisions. The historical performance of the JP Morgan VIX Buy Signal has been notable, with claims of 100% accuracy outside of recessions.

What are the trading rules for the JP Morgan VIX Buy Signal strategy?

The trading rules for the JP Morgan VIX Buy Signal strategy are straightforward. Investors buy and hold the SPY for six months when the signal is triggered, and they hold cash during the rest of the time. Despite the claim of 100% accuracy outside of recessions, the backtest results reveal variations in the subsequent performance of the SPY.