Tuesday, April 29, 2008

Complacency Up Pre-FOMC

For anyone who follows the VIX, the headline above should not come as a surprise, but here the indicator adds a little color to the story.

The VIX:SDS ratio is something I introduced last August. In essence, it plots the VIX against the 2x inverse ETF of the SPX to help determine to what extent the VIX is just moving in the opposite direction of the SPX and to what extent there is an emotional component – either fear or complacency – in addition to the normal negative correlation.

As seen in the chart below, the VIX:SDS ratio has been largely moving sideways since September, but has been drifting steadily lower since the markets bottomed in March. More importantly, the current VIX:SDS ratio is also approaching levels not sustained since July, when the credit crisis had not yet begun to unfold. Also of interest is the 0.05 differential between the 10 day and 100 day simple moving averages, reflecting that current levels of complacency are the highest in relative terms since the launch of the SDS ETF in July 2006.

As always, where there is excessive complacency, bulls should exercise extra caution.

0 comments:

DISCLAIMER: "VIX®" is a trademark of Chicago Board Options Exchange, Incorporated. Chicago Board Options Exchange, Incorporated is not affiliated with this website or this website's owner's or operators. CBOE assumes no responsibility for the accuracy or completeness or any other aspect of any content posted on this website by its operator or any third party. All content on this site is provided for informational and entertainment purposes only and is not intended as advice to buy or sell any securities. Stocks are difficult to trade; options are even harder. When it comes to VIX derivatives, don't fall into the trap of thinking that just because you can ride a horse, you can ride an alligator. Please do your own homework and accept full responsibility for any investment decisions you make. No content on this site can be used for commercial purposes without the prior written permission of the author. Copyright © 2007-2013 Bill Luby. All rights reserved.
 
Web Analytics