Sunday, August 12, 2007

The Gravity Defying Dance Continues: VWSI Remains at -9

Last week I talked about how the VWSI was in uncharted waters. Given the events of the past week, I might as well rip up the charts. The current waters can’t be any more uncharted than the financial environment can be ‘more unique,’ but let’s just say that the gap between the historical record and the current situation has widened considerably in the past week.

From a numbers perspective, the VIX jumped 17.2% for the week, moving up from 24.15 to 28.30 and now stands 92% above the close from just five weeks ago. With the futures pointing to a rally tomorrow morning, Friday’s high of 29.84 may turn out to be the high water mark in the VIX for the current upward cycle, but this is by no means guaranteed.

The VWSI finished the week at -9 and now has an almost unthinkable three week stretch of -10,-9, and -9. By comparison purposes, the only other three week stretch of significant negative VIX readings was at the height of the Russian financial crisis in August-September 1998, where the VWSI logged consecutive end of week readings of -6,-8, and -4.

I will have more to say about the uncharted waters of the VIX tomorrow, but suffice it to say that I will be all over VIX puts when the market opens.

(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.)

Wine pairing: Unusual times mean unusual wines. I continue to recommend carmenere as an appropriate pairing for a VWSI of -9. Last week I recommend a Concha y Toro 2003 Terrunyo Carmenere as well as some of the favorite carmeneres listed at Cellar Tracker. For those curious about what American wineries are doing with this rare varietal, I encourage you to read about Dover Canyon’s efforts. I will do my best to see if I can find a bottle of their carmenere so that I can report on it the next time the VIX tries a moon shot.

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