Monday, January 28, 2008

VWSI at Zero After VIX Hits 5 ½ Year High

You know it’s an interesting market when the VIX hits a 5 ½ year high (37.57) on Tuesday, while the VWSI actually manages to end the week down a point at zero.

Part of the reason for these statistical oddities is that the VIX fell 23% from Tuesday’s high to Friday’s close, resulting in a weekly gain of ‘only’ 1.9 (7%.) The 29.08 close is the second highest end of week close since March 2003, behind only the 29.99 close in the middle of August 2007.

With a 23% move already accounted for, the VWSI has a neutral volatility outlook going into the week, apparently viewing last week’s volatility snap back move as already having fully discounted future mean reversion opportunities.

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 crazy week that was and the week that lies ahead in his End of January Linkfest.

As we wait for the Fed to announce their next move(s), this might be a good time to cut back on trading an brush up on some reading. In case you missed it, I would start with Roger Lowenstein’s [author of When Genius Failed: The Rise and Fall of Long-Term Capital Management] The Education of Ben Bernanke from last Sunday’s New York Times. Three books I have recently enjoyed that are particularly pertinent to current markets are:

Also, for links to Fed speeches, charts of market action on Fed Days, etc., don’t forget my collection of Fed Links.

(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 zero, I began 2007 by recommending some Rhone blends and later expanded the category to include any expensive blend. Over the course of the year, my two favorite inexpensive blends turned out to be the $8 Oakley Five Reds (the 2003 vintage is a blend of 41% syrah, 27% zinfandel, 22% petite sirah, 10% alicante bouschet, and 1% mourvedre from Cline Cellars); and the 2005 vintage of The Hermit Crab from D’Arenberg, a delicious $13 blend of 70% viognier and 30% marsanne.

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