Sunday, March 18, 2007

VWSI at -2

After a classic mean-reverting snap back last week, the VIX Weekly Sentiment Indicator (VWSI) took more of a meandering approach in the most recent week, registering only a -3 reading following Tuesday’s 30% spike and a -4 on Wednesday, when the VIX topped out at 21.25, a reading not seen since June 2006. While technically any reading below zero has to be considered to be somewhat bearish for the VIX, the current -2 reading is still within the -3 to +3 neutral zone, where I do not consider the statistical edge and risk/reward profile of the VIX to warrant taking either a long or short position.

At a little less than 4% over the VIX’s 10 day SMA of 16.18, it is difficult to make a case that the VIX is over or undervalued at current levels. It is worth recalling that the VIX tends to fizzle on Fed Days and almost never spikes 10%, so it is particularly difficult to make the case for being long the VIX going into the upcoming Fed announcement. For those looking to trade the VIX, this is a good time to be patient and wait for better setups.

(Note that in the above temperature gauge, the "bullish" and "bearish" labels apply to the VIX, not to the broader markets, which are usually negatively correlated with the VIX.)

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