As I chronicled on Friday, this has been a “low fear selloff” even when one focuses on the volatility index of the hard hit NASDAQ 100, the VXN. In terms of the VIX, the reaction has also been comparatively mild. Last week the VIX rose 3.20 points (15.4%) to 23.94. While this is the highest end of week close in six weeks, an SPX drop of 4.5% typically triggers a rise of about 19% in the VIX, so a 15.4% rise has to be considered a lackluster move relative to market conditions.
Consistent with a lackluster VIX in the face of considerable selling, the VWSI dropped only to -3, suggest a slight mean reverting bias going forward.
As is my weekly custom, for a survey of the best in current thinking about the markets, Barry Ritholtz at The Big Picture sums up the week that was and the week that will be in his Linkfest 2008 Review/Preview.
Looking ahead, it is worth noting that the two consecutive weekly jumps of 10% or more in the VIX has only happened six time since 9/11 – and the last five of those have seen the VIX fall in the subsequent week. After two weeks of 12.3% and 15.4% gains, I would not be surprised to see the VIX pull back a little in the coming week.
(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: For a VWSI of -3, I continue to recommend a barbera. While
If you are interested in an entertaining and informative look at Italian barbera, I encourage you to check out Gary Vaynerchuk at Wine Library TV, with The Barbera Episode.