As promised, here is that brief VIX-Stretch study investigating the daily expectancy of the S&P500 for brief periods of time subsequent to extreme stretches of the VIX relative to its near-term mean. The premises are that the VIX is mean reverting, runs inverse to price, and that relative levels are more important than absolute levels.
This subject has been written about extensively, most notably in my research by Larry Conners of Trading Markets. Many entry and exit rules can be used to prove the point, here are the simple rules used in the quick studies provided below:
Entry Rules: Enter the SPY at the close when today's VIX is "X"% above its 15-day moving average.
Exit Rules: Hold the SPY "N" number of days, then exit at the close.
Two days ago on July 14th 2008, on a closing basis the VIX was more than 16% stretched relative to its 15-day closing average. Over the last ten years, entering an SPY position at that level of stretch and holding for five days would have yielded a total return of +57% over 357 days invested for a compound average daily gain of +0.121% (invested 15% of the time including overlapping periods, with no trading costs assessed).
In contrast, buying and holding the SPY over the same period (a total of 2,516 trading days) would have yielded a +21% gain for an average daily change of +0.008%, 6% of the daily stretch-rule gain. Holding for only a day improves the expectation considerably -- no wonder it is said that volatility begets volatility!