Amidst Symmetrical Triangles, VIX and VWSI Slide

With market indices in a symmetrical triangle consolidation pattern, trading ranges have been shrinking as of late. The VIX has reflected this lack of action by dropping to its lowest levels relative to its 20, 50 and 100 day simple moving averages since the beginning of the year. After touching 26.95 on Wednesday, the VIX fell back to end the four day week at 24.06, down 0.96 (3.8%) from the previous week.

A symmetrical triangle pattern is often resolved by a dramatic move one way or the other. In the current market environment, the direction of that move is anyone’s guess, but for now, I am positioned for a move to the upside.

The VWSI is a little more cautious and is showing a +1 reading at the moment, down from a +3 last week and, essentially neutral about market volatility in the near-term, suggesting that a sideways to slightly more volatile market is the most likely course of events for the coming week.

As is my weekly custom, 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 is on tap in his Oscar Night Linkfest.

I am toying with introducing a multi-faceted sentiment indicator in this weekly VWSI space, but for now I am sticking with the VWSI:

(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 +1, I recommend a guwurztraminer. My favorite American version of this wine is the dry gewurztraminer from Londer Vineyards of Anderson Valley. I have not yet sampled the 2006 vintage, but the 2005 was an unforgettable wine that I would love to see in a blind tasting against some of the top Alsatian competition.

In my previous roundup of California gewurztraminer, I suggested Navarro and Harvest Moon. For some of my top selections from Alsace, check out Trimbach; Hugel; and Domaine Weinbach. You can also check out the top-rated gewurztraminers in the 2007 San Francisco Chronicle Wine Competition.

VWSI at +1 as Historic Meltdown Approaches

In light of the oncoming freight train that is today’s session, it seems somewhat academic to recount the action in the VIX last week. For the record, last week the VIX gained 3.50 points (14.8%) to close out the week at 27.18. The VWSI rose one tick to +1.

As is my weekly custom, 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 takes a stab at what will likely be a historic trading week in his 3 Day Weekend Linkfest: Review/Preview (authored Sunday evening, so it doesn’t include the thinking coming out of yesterday’s carnage.)

I am estimating that the VIX will open between 35 and 36, then move higher from that level as the rush to the exits precludes the need for anyone to yell “Fire!” A VIX north of 40 would not surprise me, nor would a short-term bottom forming sometime later in the week.

(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 +1, I recommend a guwurztraminer. For the record, my favorite American version of this wine is the dry gewurztraminer from Londer Vineyards of Anderson Valley. I have not yet sampled the 2006 vintage, but the 2005 was an unforgettable wine that I would love to see in a blind tasting against some of the top Alsatian competition.

In my previous roundup of California gewurztraminer, I suggested Navarro and Harvest Moon. For some of my top selections from Alsace, check out Trimbach; Hugel; and Domaine Weinbach. You can also check out the top-rated gewurztraminers in the 2007 San Francisco Chronicle Wine Competition.

VWSI Lifts to +1

Closing at 15.15 for the week, up 0.43 or 2.9% from the previous week, the VIX does not feel particularly low to my untrained gut at current levels, but I must say that I was surprised to note that this is the second lowest close for the VIX over the course of the past 15 trading days.

This relatively low reading for the past 15 trading days is partly responsible for moving the VWSI off of zero to a +1 reading, meaning that while I am officially neutral on the direction of the VIX for the next week or two, there is a slight statistical bias in favor of a VIX rise.

Next week brings consumer prices, industrial production, capacity utilization, housing data, FOMC minutes, and even some Ben Bernanke testimony in to play. Of course, earnings season also kicks into high gear as well. What are the chances that these events will neatly offset each other and keep volatility in check? Even with the broad market indices making new highs, the VIX may not be as cheap as it looks.

(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: I am not sure how this happened, but I somehow neglected to mention my favorite of all the US gewurztraminers in previous posts about this varietal: the dry gewurztraminer from Londer Vineyards of Anderson Valley. I have not yet sampled the 2006 vintage, but the 2005 was an unforgettable wine that I would love to see in a blind tasting against some of the top Alsatian competition.

In my previous roundup of California gewurztraminer, I suggested Navarro and Harvest Moon. For some of my top selections from Alsace, check out Trimbach; Hugel; and Domaine Weinbach. You can also check out the top-rated gewurztraminers in the 2007 San Francisco Chronicle Wine Competition.

VWSI Edges Up to +1

After three weeks of consecutive zero readings, the VIX Weekly Sentiment Indicator (VWSI) has moved off of dead center to +1. The VIX closed the week at 12.76, down 0.16 from the previous week, marking the sixth week in a row that the VIX has closed in the 12s.

While the VWSI is not going out on a limb to predict the direction of the next big move in the VIX, futures suggest that the consensus of opinion is that the VIX will be back over 15 in six months. Predicting the path it will take to get there, however, is another task entirely.

I am officially neutral on the VIX at the moment, with a watch and wait perspective. For what it is worth, I probably will not be opening any long positions in the VIX unless it dips below 12.00 in the coming week.

(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: In my previous roundup of California gewurztraminer, I suggested Navarro and Harvest Moon. For some of my top selections from Alsace, check out Trimbach; Hugel; and Domaine Weinbach. You can also check out the top-rated gewurztraminers in the 2007 San Francisco Chronicle Wine Competition.

VWSI at +1; More Gewurztraminer Ideas

For the second week in a row, the VIX notched its lowest weekly close since 2/27, ending the week at 12.07, down slightly from a close of 12.20 the previous week.

The lack of movement in the VIX has dropped the bullish bias in the VIX Weekly Sentiment Indicator (VWSI) from a +3 level last week to the current reading of +1. At this stage of the game, it would take a sub-11 reading in the coming week for me to see a risk/reward profile favorable enough to consider opening a long position in the VIX.

(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: Last month I talked about two dry gewurztraminers from California as the perfect pairing for a VWSI of +1. I would be remiss if I didn’t praise the Old World ancestors of California gewurztraminer, the elegant Alsatian gewurztraminer. Unfortunately, Alsatian gewurztraminer is not distributed as widely as the quality of the wine warrants, so you probably won’t have many options at your local wine store. I would suggest you remember three names: Trimbach, the most widely distributed; Hugel, another winery with strong distribution; and Domaine Weinbach, a winery whose profile seems to be on the rise, and with good reason, based upon several stunning wines I have enjoyed in the past year or two. All three producers are excellent choices for gewurztraminer, riesling, pinot blanc, and pinot gris. To get a better sense of these wineries and the wines of the region, check out some reports by Lettie Teague and Robert Whitley.

Complacency Creeping Back In; VWSI at +1

Quite a few commentators, including Tim Knight, have pointed out that the VIX has reversed all of the post 2/27 spike. While volatility measures are subsiding much more rapidly than put to call ratios, it is safe to say that some investors are thinking that the brief correction has passed and the bull market can now safely resume its course. In short, some complacency is creeping back into the market, albeit slowly.

The VIX Weekly Sentiment Indicator (VWSI) reflects some of this complacency, as it has hugged the 0 mark the past few weeks, currently sitting at +1.

While the VWSI generally seeks to predict VIX movements looking out only 1-2 weeks, this is as good a time as any to remind the reader that longer term seasonal cycles are at work as well. You may never have heard, “Sell in March and go away,” but the March-June period marks the downside cycle of the mid-year “V” pattern in the VIX that I have commented on earlier.

I would not be looking to anticipate volatility spikes at this stage, but I would expect that we will see a few more smaller ones in the coming weeks. Better yet, be prepared to play a little Whac-a-Mole and fade these spikes as they occur.

(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: A while back, a reader had the temerity to suggest that I might want to consider offering a wine pairing with the VWSI. Why not? I've been neglecting my wine blog, so why not jump start the latent oenophile in all of us. For the current +1 reading, coming off of some violent volatility spikes and ushering in the new season, I am recommend a dry gewurztraminer. Gewurztraminer is a wine that can stand up to all seasons and all levels of volaltility. It has more personality than any other white wine, is found in more styles and...it's not chardonnay. While the classic version comes from Alsace, I am a big fan of several American versions of this wine: dry; off-dry; and the dessert variety. One winery that gets all three versions right is Navarro. Last weekend, however, I found a stunning example of dry gewurz off the beaten track in the Russian River Valley at Harvest Moon. I hesitate to mention Harvest Moon because it is such a small winery, but the wines are so good that they deserve a wider audience. Enjoy!