A Dynamic Wave-VIX Approach to Investing

Abstract: The VIX was introduced to the financial markets in 1993 by Dr. Robert Whaley and is a measure of the stock market’s expectation of volatility based on S&P 500 index options. The VIX has become popular as a hedge against volatility. In this paper we test using the Elliott Wave Oscillator and relative VIX reading to move stocks into cash. The results are promising.

In October 2008, I came across an article, “On Wall Street, Eyes Turn To The Fear Index.” and created a rudimentary “market anomaly” study, and presented it to my co-fiduciaries in high finance. This “legendary study” eventually led to a patent and the launch of a new “innovative” line of products for a company that had its protective roots in high finance since before The Great Crash.

Now, I know what your thinking you can easily read into this story and think there’s a high probability that under the diversification concept I created an innovative product that blew up a model tied to an entire asset class.  The theory therefore would be that I was somehow involved in the creation of an innovative diversification product like the CDO that took down Bear Stearns (Lehman, and Merrill).

There is also a theory based on another legendary concept called diversification. It’s legendary because 1) studies have proven that when it is tested it doesn’t hold up, 2) the author of the original theory won a Nobel for it, and 3) its components are still being used today to create faulty “innovative” diversifications that promise that good old fashioned guise of the same or higher returns with equal risk. That won has been around since the advent of mean-variance optimization that led to “innovative” diversification solutions like strategic asset allocation aka buy and hold and a widely used “innovation” for fiduciary plan sponsors and participants under the “prudence” guise.

What’s even more telling about the racket of high finance is that this same theory which won a Nobel for two other high finance legends for their versions of high risk/high return is still being taught in higher education today. So when did I figure out these same old theories were still alive when I earned an online high finance degree to see what had changed in high finance from a now very very legendary business school without studying for the final and scoring an 89. See I knew as early as 2005, that the return component should be low valuations equals high returns, and high valuations plus high volatility equals high risk. And I learned in 2019 that one of the most prestigious business schools in the world and high finance had not learned a thing from the 2000-2002 and 2008-2009 bear markets.

I already knew high finance was using these dead theories and asset allocation approaches since when I left high finance in the ultimate fiduciary role, the start of the last bull, the product was hitten the market in earnest and now they are a force to be reckoned with because the high finance industry accompanied by the fiduciary community has them bamboozled into thinking they can meet there fiduciary diversification requirement and participants are being told by registered fiduciaries that are safe and prudent. It’s just dead wrong on both the registered investment advisors’ part and more importantly the plan sponsor because when this product blows up someday, all the fiduciaries found at the scene will be proven guilty.

In this paper, we are specifically going to utilize the Elliott Wave Oscillator (EWO) which is simply the difference between a five-period and a thirty-five-period simple moving average.

Utilizing the Elliott Wave Oscillator with the VIX, this asset allocation approach may be used to allocate in and out of stocks when the EWO is above 30.

The EWO indicator is used to determine where an Elliott wave ends, and another begins. When the oscillator begins to put in a series of lower highs while price puts in higher highs, a trend change occurs.

The basis of the Elliott principle, which quantifies market crowd behavior, works best with stocks that (1) have lots of volume (liquidity) and (2) move according to fundamental forces of fear and greed on the part of many participants.

 Dynamic $ 1,776,733
100% Stocks $ 1,351,778
 Difference $    424,956
 % Difference31%


Whaley, Dr. Robert (2000). The Investor Fear Gauge. The Journal of Portfolio Management.

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