Wednesday, November 5, 2008

VIX Way Below 10 Day SMA

Rob Hanna at Quantifiable Edges has a study up this morning with the title VXO Suggesting A Pullback Is Likely. In his previous Is A Low VIX A Short Trigger? Rob concluded, contrary to popular wisdom and quite correctly:

“Owning the S&P 500 when the VIX was more than 10% below its 10-day moving average was significantly more profitable on average than owning it when it wasn’t.”

Quoting Rob again, the important distinction to make is that “when the VXO becomes extremely stretched, as it is now, then that changes,” with an extremely low VXO “very suggestive of short-term bearish implications.” [Emphasis in the original]

My initial thought upon reading this is to recall an important VIX heuristic that VIX trades have a higher expectancy when the VIX is extended to the upside than to the downside. My second thought was that the reason the VIX (or VXO) typically gets extremely extended to the downside – at least relative to a 10 day moving average – is that volatility is usually reversing a large upward spike.

My research shows that since 1990, the 30 instances in which the VIX was lowest relative to its 10 day moving average (at least 18% below it) were good times to be long the market, on average. In the one to two week time frame following the relative low readings in the VIX, there was small advantage to being in the markets; after two weeks or so, the advantage for longs becomes more pronounced.

The bottom line is that while the VIX and VXO are well below their 10 day moving averages (yesterday was a record in that regard for the VIX), just last week they were extremely extended above their 10 day moving averages. This week’s extreme readings are as much a residual effect of the extreme readings in the opposite direction as anything else. For now the VIX looks to be in a range that is consistent with macroeconomic conditions, futures prices, and recent volatility. For those that follow the VIX:VXV ratio, it is currently at 1.03, also suggesting that volatility readings are in a ‘normal’ range given current circumstances.

7 comments:

Anonymous said...

very nice, two weeks out will be after the key Nov. 15th date, when hedge fund redemptions are due and the G20 meets for a possible 'bretton woods II'
-deacon

Anonymous said...

Rob Hanna of Quantifiable Edges is correct in anticipating a pullback thus far as the DJIA and SPX 500 decreased by 486 and 53 points today. This represents the largest daily decline since October 22nd and the elimination of all pre-election gains made since the close of trading on October 30th. The trading between now and November 15th, the date of the G20 meeting and the deadline for hedge fund redemptions, should be very interesting.

valeriobrl said...

NO ema13>ema34: NO SHORT PARTY!!!
(ema13 red dashed ,ema34 red solid)
http://www.flickr.com/photos/31205984@N04/3007273957/sizes/o/

valeriobrl said...

http://www.ecb.int/events/calendar/mgcgc/html/index.en.html

Anonymous said...

by a poster at this blog whose short the market post was ahead of the other blog mentioned, since VIX closed +14.31% yesterday, buy the market now

valeriobrl said...

Vix it´s quite weak today...
http://www.flickr.com/photos/31205984@N04/3007453477/

Anonymous said...

VIX green off the get go said no rush to go long the market(now VIX is up +8%, so +22% since tuesday close)...i wouldn't have shorted the gap down, although that has now worked...the problem with these 'crazy' moves appears to be the sovereign wealth funds, who have relatively unlimited capital to move markets,and thus are abusing the poor hedge funds and banks
-deac

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