Dr. Brett on Put to Call Ratios

I was away for the weekend and am still catching up in my reading, but it looks like Brett Steenbarger saved me a post on the abnormally low put to call ratios.

According to Dr. Brett, Jason Goepfert’s SentimenTrader.com apparently has a more in-depth discussion of the put to call issue. I should add that I am not a subscriber to SentimenTrader, but have had it on my To Do list for a couple of months.

Finally, some of the more observant readers may have noticed that I added a link to the ISEE at the upper right hand corner of this blog last week. The ISEE is a sentiment index (in this case, a ratio of call to put options, multiplied by 100) compiled by the International Securities Exchange or ISE. In some respects, it is similar to the put to call ratios at the CBOE, but without the heavy institutional action in the indices that tends to dominate the activity on the CBOE.

I have been looking hard at the ISEE in the past week because of the unusually low readings, including consecutive all-time lows (data go back to 2002) in the 10 day SMA last Wednesday and Thursday.

Stay tuned for more on put to call data, what it means, and its predictive power.

March Madness and the Sweet 64

It has been quite a week, especially for VIXophiles. Not only is March Madness just around the corner, but we had our own VIX bracket buster on Tuesday when the VIX posted a sweet 64% gain.

Highlights from the week include…

Jim Kingsland being the first I saw to report that the China selloff was engineered

Brett Steenbarger putting big down days in perspective and setting expectations going forward, then adding an interesting kicker

Ticker Sense on where in bull/bear market cycles 3% declines are most likely to occur

Tim Price with my favorite quote + article look back at the drop

Adam Warner on some of the problems with VIX options

David Merkel on the definition of liquidity (the post was from the previous week, but since I just discovered The Aleph Blog and added it to my blogroll this week, I am bending the rules a little here)

blackenterprise.com picks up a story on Hedge Fund Research adding a Volatility Index for “tracking the performance of hedge fund managers who trade volatility as an asset class.”

This week’s irony award goes to Tim (Don’t-call-me-Permabear) Knight, who was snowed in somewhere in bear country when the real thing was waltzing down Broad and Wall. Tim is always a good read but should be one of your first stops when things get bearish.

Finally, I usually do not make predictions, but it was a strange week, so I thought I’d share several additional items of a personal nature, perhaps all black swans:

• What is the likelihood that a guy who has a blog with the title “VIX and More” would have his birthday on the day the VIX has a historic spike?
  
  
• What is the likelihood that I would talk about earthquakes as a metaphor for volatility and then feel one just a couple of hours later?
  
  
• What is the likelihood that I would make my first specific prediction about volatility for the coming week just last week (I thought predicting a 17% increase was going out on a limb) and talk about the need for having a plan for a -300 Dow day?

Valentine’s Day Massacre: The Curse of Not-So-Random Roger?

The Lauriston Letter (which can be counted on not just for high quality market commentary, but also for an unmatched sense of complementary images) pointed out an interesting tidbit on Tuesday:

“How often do you see volatility indexes move from the upper Bollinger band to the lower Bollinger band in one day?”

The answer, of course, is almost never, but I decided to dredge my archives anyway in search of a reversal that best resembled the two day swing from above the upper band to below the lower band during February 12-14.

I tried to do for Excel what datawink does for charts and caught very few fish – 11 over the past 17 years and only two during that past decade – that resembled the Valentine’s Day swing. The combination of trying to locate CCI and %R reversals of such large proportions in just 48 hours proved too daunting of a hurdle to come up with anything close to an exact match.

Ironically, the two closest matches turned out to be the ones from the last decade: the three days ending on 11/3/04 and the three days ending on 7/11/05. So I pulled up a bunch of charts to see if the VIX or SPX did anything of interest in the days or weeks that followed these two dates and came up empty. If anything, the markets were considerably more quiet than usual in and around this period, and for the other nine VIX swing periods as well, which is consistent with observations made by Brett Steenbarger about the predictive ability of low volatility readings. Perhaps these were just two random trees felled in a distant forest.

Undaunted, I decided to check the archives of some of the blogs that have archives going back to 2004 and made a stop at Random Roger’s Big Picture. This is where it starts to get interesting…

On Sunday, 10/31/04, Random Roger was posting about how Barron’s was “fixated on how low the VIX is.” In fact, the VIX was at about 15 at the time and Roger was quick to point out that the then current 15-16 range was not low by historical standards. The very next day, the VIX started an unprecedented high to low swing, moving from 16.76 to 13.79 in two days.

Eight months later, on July 6, 2005, Roger dusted off his old post and repeated his point that the VIX was still low by historical standards. What happened next? Even more dramatic fireworks, as the VIX pulled a stunning high-low swing from 13.92 to 10.53 in two days, resulting in the largest CCI (20) reversal since the inception of the VIX and confounding even John Bollinger himself.

So those are the two precedents. Is it merely a coincidence that not-so-Random Roger happened to warn about the VIX not being particularly low just before the largest VIX swings to the downside ever seen? And where was Roger before the Valentine’s Day Massacre of 2007? I have seen nothing on his blog that could lay blame at his feet, but would the VIX really have the temerity to make a move of this magnitude without his public approval beforehand?

I will watch this story closely and bring you any further developments…