Thursday, March 27, 2008

VIX Follows Markets Down in Early Trading

Given that the VIX moves in the opposite direction of the SPX on about 76% of all trading days – and close to 90% of the time when the SPX moves at least 1% – I watched with considerable interest when the VIX followed the SPX and the rest of the broad indices down during the first hour of trading.

As I write this, the SPX is down 0.54%, up a little from the 0.87% loss that represents the low of the day. As the chart below shows, however, the VIX has been down below yesterday’s 26.08 close for the entire trading day. For a brief period from 10:15 to 10:25 a.m., a high volume selloff in Lehman Brothers (LEH) triggered considerable investor anxiety and pushed the VIX up while the SPX slid, but now that this episode appears to be in the rear view mirror, the VIX is once again moving down.

Also of interest, if you study yesterday's VIX action, you can see that a weak VIX coincident with a sideways to down SPX, while unusual, is a continuation of yesterday's trend.

A high level of anxiety about the markets (i.e., a formidable ‘wall of worry’) and some indications that market sentiment may have bottomed can provide a solid base from which the markets can rebound. Little by little, the markets will strengthen each time that investors shrug off bad macroeconomic news or when panic fails to materialize following weakness in the likes Lehman Brothers and other financials that are currently operating under a dark cloud of anxiety.

While this credit crisis should linger for many months to come, there are more indications that the markets are putting in a bottom and are prepared to move higher before all the toxins have had an opportunity to work their way through the financial system.

2 comments:

Ben Bittrolff said...

I noticed that as well this morning and found it just as interesting.

As a general rule (during the credit crisis) I plot my charts with an overlay of the VIX and/or the Yen in real time. I rely on the VIX and the Yen as leading indicators as at best and confirmation at worst.

The Yen as a Leading Indicator

Unknown said...

Interesting and thought-provoking observations, Bill... thank you.

I have to confess I'm not sure about Mr. Market's mood right now. Paradoxically, I'd be more certain had the cash VIX spiked higher on "BSC Monday", say to the mid-40's or so. Certainly there was what I'd characterize as unreasonable panic that morning (because I felt that the Fed's 'line in the sand' actions and support of JPM's $2 bid for BSC were positive developments), but it just didn't feel like capitulation. And though the Fed's actions signalling that it'll defend the financial system has taken much of the 'crisis' fear out of the market, the market's black mood seems to have lifted too fast, given that recession, foreclosures, rising commodity prices, and declining consumer confidence are still problems... and really haven't changed since before BSC's fall.

And all the media speculation about whether the BSC crisis was the catalyst we'd been waiting for to kick-start another bull run is well.... troubling.

But you make an excellent point that the market's reaction to bad news is telling. If the market shrugs off bad news about housing, recession, oil prices, etc. then a major shift in sentiment would be undeniable. :)

tnt

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