Thursday, April 23, 2009

The New VIX Macro Cycle Picture

Since the dawn of VIX data, which extends back to 1990, the VIX has shown a tendency to move in cycles of 2-4 years that I refer to as VIX macro cycles.

The chart below shows six distinct VIX macro cycle periods of declining, rising or flat volatility. For now I have assigned a letter to each period, but at some point I may go back and name each of them, describe the various influences on volatility during the period and set about establishing a fundamental and technical basis for classification.

My goals for today are much more modest. For the moment I am establishing January 2007 to November 2008 as the official endpoints of the most recent period of rising volatility. As of December, we are in a new VIX macro cycle. While the first few months of this new volatility era showed a dramatic decline in volatility, I suspect that volatility will flatten out relatively soon, as was the case when the volatility spikes of 1994 and 1998 ushered in a period of relatively flat volatility.

Note from past volatility spikes that the initial snap back to lower levels of volatility typically last from 4-6 months after peak volatility. If this pattern were to be repeated once again, then I would expect volatility to put in a new bottom in no more than the next 2-3 weeks.

Guessing where volatility will find a new plateau is not easy, but for now I am establishing a provisional bottom of 30. Ultimately, I would not be surprised if I move the bottom down to somewhere in the 25-27 range, but there is a lot of work to be done before that much fear and volatility can be driven from the collective investor psyche and markets are able to establish a degree of comfort with the various financial and economic institutions that will shape the major events and policies of the next few years.

[source: StockCharts]

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