Wednesday, May 7, 2008

VIX Surfing Down the Moving Average Channel

I have seen a number of typing heads out there proclaiming that the VIX is “too low” and therefore the recent rally is about to run out of steam. I have my own reasons (yesterday’s VIX:VXV ratio warning sign, for instance) for thinking that the current move is overextended, but labeling the VIX as “too low” is not one of those reasons.

As best as I can determine, most people who use the VIX to time the market focus on the distance between the current VIX value and 10 day simple moving average, with the expectation that the greater the distance between the two, the more likely that the VIX will snap back in the direction of the SMA. With that in mind, consider the chart below, which shows the VIX in the context of the 10 day SMA and two moving average envelopes that show the 10% (dotted green) and 20% (solid green) distance from the SMA. For the last 6 ½ weeks or so, the VIX has been dropping steadily, but in such a fashion that its movements have largely been constrained to a channel between the 10 day SMA and the -10% moving average envelope. At current levels, the VIX is barely 3% below the very same 10 day SMA, hardly what most would consider to be in the “too low” category.

7 comments:

Bill aka NO DooDahs! said...

Geez, a VIX moving lower. Who'd have blogged that?

BTW I miss your portfolio updates. Saving that for the newsletter customers?

Bill Luby said...

Hi Bill,

Always good to hear from you, even if it is just to grab my lob pass and slam it home.

Portfolio A1 is not one of the four model portfolios that track in the newsletter (those are Aggressive Trader, Growth, Foreign Growth, and Stock of the Week), but I did want to periodically update its performance here. I was going to do it monthly, but then decided on a whim to do it quarterly.

Since you asked, Portfolio A1 is up 20.92% since the 2/16/07 inception, versus a 2.56% decline in the SPX during the same period...so I am happy with the performance. YTD it is down 0.84%, but that is better than the -3.4% so far in the SPX.

Right now the portfolio holds TBSI, MOS, PQ, WRLD and BRP.

Cheers and good trading/blogging,

-Bill

Priyanka Pulla said...

Hi

I had a basic question and thought this would be the best place to ask it. Isn't Implied Volatility a function of the size of
the move, rather than direction? So why is VIX more commonly referred to as a fear index if high VIX can imply movements in both directions? I mean- HOW and exactly where does the direction get factored into VIX? Would greatly appreciate absolutely any clarity on this:-)

Priyanka

Bill Luby said...

Hi Priyanka,

This is an excellent question -- and one that deserves a full post to explain my thinking. Look for a detailed commentary on this soon.

I will clarify the matter as best as I can, but you raise some of the same questions I had when I first started studying the VIX.

Cheers,

-Bill

Priyanka said...

Hi Bill

That will be really good. Will keep checking your blog for the post.

Priyanka Pulla said...

Hullo, you never answered the question!

Bill Luby said...

Hi Priyanka,

Thanks for the reminder. Assuming volatility news doesn't get in the way, I will dive into your question starting tomorrow and then get into a broader discussion of implied volatility and historical volatility soon thereafter.

Cheers,

-Bill

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