VWSI at Zero Even though VIX Jumps 16.6%

It is very unusual to see the VIX make a significant move and the VWSI to register a zero reading, particularly given the mean-reverting bias built in to the VWSI calculations. As a result, last weeks 16.6% jump in the VIX has me suspecting that the VIX may be a better barometer of market volatility in the coming week or two.

Officially, the VIX ended the week at 28.01, up 3.99 or 16.6%. While the VIX has been mostly going sideways the past three weeks, the current level is still 66% higher than the 18.47 close just seven weeks ago.

Normally, when I see the VIX jump 15% or more in one week, I start to think about selling some VIX options. With the VWSI at zero, however, there doesn’t seem to be a tradeable edge in the current situation. Furthermore, a quick glance at the VIX COT report chart shows the commercials continuing to add to long positions even as the VIX trends higher (the orange line is the ‘net commercials’ and dark line is the ‘net large traders’) – a very unusual posture for a group that generally prefers to fade the big moves. Perhaps something wicked this way comes…

(Note that in the above temperature gauge, the "bullish" and "bearish" labels apply to the VIX, not to the broader markets, which are usually negatively correlated with the VIX.)

Wine pairing: For a VWSI of zero, I began 2007 by recommending some Rhone blends and later expanded the category to include any expensive blend. Over the course of the year, my two favorite inexpensive blends turned out to be the $8 Oakley Five Reds (the 2003 vintage is a blend of 41% syrah, 27% zinfandel, 22% petite sirah, 10% alicante bouschet, and 1% mourvedre from Cline Cellars); and the 2005 vintage of The Hermit Crab from D’Arenberg, a delicious $13 blend of 70% viognier and 30% marsanne.

VWSI Rises to +3 as Volatility Wanes

The VWSI last hit +3 just eight weeks ago and prompted the headline VWSI Slips to +3; Pressure Builds for Correction. That correction arrived, but the bigger question is whether it is going to be taking a seasonal vacation this year. I suspect that this will not be the case and December will have more than the usual amount of fireworks, so I will be long dry gunpowder.

With a drop of 3.05 points or 11.7% to 22.91, the VIX had its lowest end of week close in five weeks, but I wouldn’t necessarily read too much into these data points. Ultimately it is what the markets do at major support levels that will determine how volatile we are going forward and not volatility that will wag the dog.

For a survey of the best in current thinking about the markets, Barry Ritholtz at The Big Picture sums up the week that was and the week that will be:

• December Linkfest: Week in Review
  
  
• December Linkfest: Week in Preview

Looking ahead, for those with an interest in the COT report, note that the commercials have been getting long volatility as of late. While the track record of this group is not great, it is better than most, so their actions bear watching.

(Note that in the above temperature gauge, the "bullish" and "bearish" labels apply to the VIX, not to the broader markets, which are usually negatively correlated with the VIX.)

Wine pairing: For previous VWSI readings of +3, I highlighted sauvignon blancs from Cloudy Bay and the Marlborough region of New Zealand, as well as some excellent California producers whose sauvignon blanc can be had locally for $10 or less: Bogle; Chateau St. Jean (where it goes under the fumé blanc moniker); Concannon; Kenwood; and Sterling. More recently, I was impressed by a complex sauvignon blanc, with a little bit of oak, from Gary Farrell Vineyards. Their 2005 effort can be had for about $25; for my money, it knocks the socks off almost all of the chardonnays in that price range.

Finally, for an entertaining (think the mannerisms of Joe Pesci and Woody Allen blended with the enthusiasm of Jim Cramer) and informative look at sauvignon blanc, I encourage the reader to sample Gary Vaynerchuk's "Sauvignon Blanc Taste-Off" on wine library tv.

Commercials Get Long the VIX in a Big Way

The chart below comes from BuyTheBottom.com and reflects positions from the Commitment of Traders report published last week. If you are not familiar with these reports there is no good short explanation I can offer, other than to pass along that conventional wisdom sees the commercials as the smart money in this equation. Their record is not great, but their positions generally have better predictive value regarding the future of the VIX than that of the large traders or the small traders.

I do not put a great deal of stock in the COT data, so I am posting the chart largely for informational purposes. Even if you don't agree with a dissenting opinion, it is important to pay attention to it, particularly if others do. Finally, if the commercials are correct, it looks like we have a category 5 volatility storm headed our way.

Record VIX Futures Trading Yesterday

Yesterday the CBOE Futures Exchange established a new single day volume record for trading in VIX futures, with 12,102 contracts changing hands. The new record surpassed the previous record of 10,673 by 13.4%.

For those who wonder if new volume records for VIX futures may be significant, the old record stood for exactly seven months, having been established on October 10, 2006. In terms of historical context, the October 10 activity preceded a COT report that noted a substantial swing in the holdings of commercials from net long to net short. While commercials are generally considered to be the most savvy of the three groups in the COT report, the VIX did very little over the next 5 ½ months from October to late February, save drift slowly lower as volatility continued to compress.