Data from Schaeffer’s Quantitative Analyst Chris Prybal shows that in the immediate wake of these “COT mean reversions,” the VIX tends to cool off, with the index logging larger-than-usual declines over the one-week and four-week periods following a signal — although the two-week returns are largely in line with what’s to be expected. After that short-term dip, however, the VIX then goes on to surge substantially over the next two-month, three-month, and six-month time frames, culminating in an average 26-week post-signal return of 38.76% — easily dwarfing its comparable “anytime” return of 3.20%.

As for the S&P 500 Index (SPX), it’s just the opposite. After large speculators revert to net short VIX futures, the broad-based equity tracker comfortably outperforms its anytime returns over the next week, two weeks, and four weeks — and then things break down. At the two-month mark, the SPX is positive only 29% of the time. Six months after a signal, the index’s average return totals just 0.06%, compared to the anytime average of 5.90%. And, unlike the VIX 52-week returns post-signal, the S&P continues to display convincing underperformance as far out as the one-year mark.

In the simplest terms, it appears that stocks catch an initial tailwind as the large speculators unwind their net long positions on VIX futures. But looking at the VIX returns beyond those first four weeks, the group effectively proves its mettle as a contrarian indicator by returning to a net short position just ahead of massive VIX outperformance that takes place over the two-month to six-month markers.

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