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.

VWSI Holds at Zero in Advance of Black Friday Data

It was a quiet week in Lake VIXbegone. Very quiet. So quiet, in fact, that the VWSI remained stuck on a zero reading for the second week in a row and the VIX gained only 0.47 points or 1.8%, the fourth lowest weekly change all year.

As is my new custom, I look to Barry Ritholtz at The Big Picture to sum up the week that was and the week that will be:

• Thanksgiving Day Weekend Linkfest: Review/Preview

Consumers were apparently keen on snapping up bargains on Black Friday, where sales were up 8.3% over last year and followed through on Saturday, with sales up 5.4% versus the previous post-Thanksgiving Saturday. The combined Friday-Saturday statistics show a 7.2% increase in sales over 2006, with a 4.8% increase in traffic more than making up for a 3.5% decline in purchases per person.

Whether the surprising strength in consumer spending will take some of the momentum away from the bears remains to be seen, but my personal bias is slightly bullish going into the week, despite the weakness in a number of technical indicators.

(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 have heretofore been recommending a variety of inexpensive blends. Just this week I enjoyed the 2005 Trentadue Old Patch Red. This berry explosion is an unusual blend of 70% zinfandel, 20% petite sirah, 5.5% carignane and 4.5% syrah. Surprisingly, the petite sirah comes through as dominant, with the zinfandel playing a rare secondary role, with the exception of what I thought was a touch of residual sugar in the finish. This is a fun wine to drink and at $12 at my local wine store, worth seeking out.

Previous recommendations for a VWSI of zero have included Brassfield Serenity, as well as a wide variety of Rhone blends.

VWSI Hits -9 as VIX Spikes

In a week where technology stocks were hit harder than financials for the first time in a long time, the VXN rose 30.1% while the VIX rose 23.9% or 5.49 points. Coming on the heels of last week’s 17.6% jump in the VIX, this marks only the third time this decade that the VIX has risen 15% or more in two consecutive weeks, with the two previous instances being two weeks in the middle of May 2006 and the two weeks spanning 9/11.

Even with the VIX printing a rare -9 reading (the third -9 in four months, but only the fifth in the past six years) and the NASDAQ registering the biggest weekly drop in five years, the selloff had a relatively orderly feel to it – at least so far. The fact that the VIX is still ten points below its mid-August high suggests a lack of panic, as does the below average fearogram readings for the SPX:VIX ratio on both Thursday and Friday.

In addition to the extra spice of options expiration, next week’s government data includes a hearty broth of October retail sales data (Wednesday), October consumer prices (Thursday), and October’s industrial production and capacity utilization figures. Earnings season continues, with a healthy does of retail and technology earnings on tap as well.

For a comprehensive look back on last week and a glance at what the coming week may have to offer, I recommend the following links from Barry Ritholtz at The Big Picture:

• Week in Review
  
  
• Week in Preview

While the -9 VWSI reading suggests a likely bounce in the coming week, my Where’s Waldo analysis tells me that long red candles in the NASDAQ rarely trigger bounces in the following week. Given that history, the relative lack of fear in the SPX:VIX ratio, the failure of the ISEE to drop below 100 last week, and several other factors, I enter the week by carrying over my bearish bias. I will be watching closely to see what sort of enthusiasm the bulls put into efforts to establish a bottom and threaten yet another quick retracement. This time around I expect it to be at least as difficult as it was in the summer of 2006 for the bulls to push the markets back to new highs, but…this selloff is still early.

(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 -9, I continue to recommend carmenere as an ideal pairing. The last time around, I sugested a Concha y Toro 2003 Terrunyo Carmenere, some favorite carmeneres listed at Cellar Tracker, and an American effort at Dover Canyon. For ideas about varietals I do not have a lot of experience with, I often check out what is selling at one of San Francisco’s best wine stores, K&L Wine Merchants. A quick search on their site yields a good number of carmenere blends, as well as several selections where carmenere is the dominant varietal.

Selloff in Financials Jolts VIX; VWSI at -3

The Fed gave the markets a 0.25% rate cut, but in the 2 ½ days that followed, investors did more selling than buying, pushing the VIX up 3.45 points (17.6%) to 23.01 by the end of the week and marking the highest close in the VIX in seven weeks.

Commercial banks and other financials helped to increase investor anxiety, with Citigroup (C) and Merrill Lynch (MER) causing most of the consternation. For a superb summary of the week that was and the week that might lie ahead, I highly recommend reading up on what Barry Ritholtz at The Big Picture has assembled (I think I’ll make these links a regular feature of my weekly VWSI update):

• Daylight Savings Linkfest: Week in Review
  
  
• Daylight Savings Linkfest: Week in Preview

Turning to the VWSI, the increased volatility helped to push the dial to a VWSI of -3 by the end of the week. The last time the VWSI closed the week at -3 was back in the first week of 2007, when the ‘spike’ to 12.14 initially looked like an aberration, as the next seven weeks saw the VIX close in the 10s and low 11s. Of course, everything hit the fan on February 27^th and it has been a different investing environment ever since. I have no reason to predict that the current -3 reading may come at a similar juncture, but it is always instructive to look back at recent history and try to imagine how the current market lens differs from the already outdated one.

(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 -3, I suggest a versatile light red wine. No, not a Beaujolais (even though another Beaujolais nouveau release date is soon approaching) or the gamay grape behind the wine. No, not a pinot noir either. Instead, I recommend something old and something new: a barbera. This grape is widely planted in Italy and is used frequently as a blending grape, both in Italy and in the United States.

While Italy certainly produces the best know barberas, Barbera d’Asti and Barbera d’Alba, it is fruity, highly drinkable version of this wine from the Sierra Foothills that recently tickled my fancy: the 2005 Renwood Sierra Series Barbera. If you are looking for a different varietal to add to your list of everyday reds, seek this one out. For only $9 at my local wine store, it’s a bargain and a great change of pace.

If you are interested in an entertaining and informative look at Italian barbera, I encourage you to check out Gary Vaynerchuk at Wine Library TV, with The Barbera Episode.

VWSI at Zero Pre-FOMC

As the markets settle in for what will likely be 2 ½ days of waiting and mostly sideways action in advance of the Fed decision, the futures are suggesting that a 0.25% rate cut is in the works.

The VWSI is not tipping its hand vis-à-vis volatility expectations, moving back to zero after registering a fairly extreme -6 last week. The -6 VWSI reading preceded a week in which the VIX fell 3.40 points (14.8%), bringing the volatility index back down to the levels of most of the short and medium-term moving averages.

Recall from previous VIX and More research that the VIX has a tendency to anticipate higher volatility than the post-FOMC frenzy actually delivers, drop on the day of the announcement and perhaps one additional day, then take two weeks or so to attain pre-FOMC levels. In the absence of any compelling reason to expect something different this time around, keep an eye on the typical scenario to see if it plays out once again.

(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 continue to recommend an inexpensive Rhone blend. Some of my recent favorites include the following New World wines: Oakley Five Reds; Robert Hall’s Rhone de Robles and Tablas Creek’s Cote de Tablas Blanc; Wrongo Dongo, the contrarian favorite from Spain; as well as The Hermit Crab and The Stump Jump (I prefer the white over the red) from D’Arenberg in Australia. If you are looking for additional ideas, I encourage you check out the Rhone Rangers.

VWSI Back to Zero. Was That the Bump?

In a week where Goldman Sachs hit a new all-time high while BIDU had a range of 58 points in one session, you could make the case that volatility is winding down or just warming up for the next act. Despite Thursday’s 13.3% jump in the VIX, the volatility index ended the week up only 4.8% or 0.92 points to 17.73. Still, this small bump was enough to send the VWSI back to neutral, following an unprecedented run of three consecutive high readings in the indicator.

The coming week is bound to provide considerable ammunition for both bulls and bears, as there are many important earnings reports in the technology and finance sectors. Barry Ritholtz at The Big Picture breaks things down in another excellent “Week in Preview” with details on earnings and upcoming government data, as well as the usual high quality set of links to some of the top commentary and analysis in the investment world. Even if you don’t click all the way through, be sure to check out Barry’s summaries.

For what little it is worth, I am more bearish than the VWSI, but the bears are going to have to do a lot better than a one day pullback to make me a believer. Perhaps earnings and options expiration will help to sort out the believers and the non-believers.

(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 recommend an inexpensive Rhone blend. Inexpensive is a relative term, but with yesterday I finally got around to tasting a $13 wine that from D’Arenberg that managed to secure a 90 rating from Robert Parker: The Hermit Crab. The 2005 version is 70% viognier and 30% marsanne. To my palate, the marsanne sets the tone here, keeping the viognier component in check and delivering a subtle complexity that astonished me. Frankly, I can’t think of any white blend in this price range that I have enjoyed more in recent years. Seek this one out.

For other inexpensive Rhone blends, I continue to also recommend: Oakley Five Reds; Robert Hall’s Rhone de Robles and Tablas Creek’s Cote de Tablas Blanc; Wrongo Dongo, the contrarian favorite from Spain; and The Stump Jump (I prefer the white over the red) from Australia. If you are looking for additional ideas, I encourage you check out the Rhone Rangers.

VWSI Slips to +3; Pressure Builds for Correction

The word ‘correction’ implies that something is wrong that needs to be corrected. Even though I spent a good portion of last week on the wrong side of the markets, that doesn’t make the markets wrong, it merely makes me wrong.

Still, the persistent high positive numbers registered in the VWSI over the past three weeks is unprecedented, which is part of why I have been wrong side of the market. While the VWSI and VIX are excellent short-term indicators, they are far from omniscient.

Strictly by the numbers, the VIX registered its fourth consecutive substantial weekly drop last week, losing 1.09 or 6.1% to end the week at 16.91. This is the lowest end of week reading in three months and raises the question of where the VIX will ultimately find a bottom. I recently attempted to answer this question; and Adam Warner at Daily Options Report had some similar thoughts on the subject.

(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. This time around, I recommend an elegant, 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.

VWSI at +4; Next Bump Soon?

So what’s with the round numbers? Surely the conspiracy theorists know that prior to last week the VIX had closed at a round number only 9 times in 18 years. Now that we have back to back closes at 19.00 and 18.00 the stars must be aligning for something. But what?

The VWSI, which is registering a reasonably elevated +4 on the heels of last week’s +6, thinks that a significant VIX spike is just around the corner. Back to back positive readings of this magnitude in the VWSI are extremely rare and with volatility below just about every moving average, this appears to be a good time to consider lightening up on equities and getting long volatility.

With the VIX dropping exactly one point (5.3%) this week to 18.00, we are now down to the lowest end of week reading in ten weeks. Like I said last week, with all the headline risk, the VIX looks like fairly cheap portfolio insurance.

(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 +4 I heartily recommend a riesling. As a matter of fact, riesling is a wine that goes with just about any VWSI. It is versatile food wine that comes in a wide variety of styles, from bone dry to the sweetest of dessert wines . Frankly, this wine deserves to be more popular than chardonnay, but, at least in the United States, riesling’s stature has been weakened by too many associations with middling off-dry versions of the varietal.

German-speaking readers can find a wealth of information about riesling at Riesling.com; those who rely on English will have to be content with the likes of Riesling Report.

In terms of top producers, all of my comments about Alsatian gewurztraminer producers apply to riesling as well. For an exemplary California riesling I can highly recommend Trefethen Riesling from Napa, a wine that Eric Asimov of The Pour (New York Times) first brought to my attention earlier this year. This wine is a steal for $16 at my local wine store.

VWSI Jumps to +6 on Rate Cut

It took 25 trading sessions for the VIX to shed half of the excess baggage it had accumulated by the August 16 intra-day high of 37.50. Thanks to the Fed’s larger than expected rate cut, not only is the VIX looking like a competitor from The Biggest Loser, but Friday also marked the first day since July that the VIX spend the entire day in the teens.

The VIX dropped 5.92 points or 23.8% this week to end the week at 19.00, but consistent with the volatility roller coaster theme, this was only the third largest weekly drop of 2007. The drop was enough to turn the VWSI around, however, pushing that indicator from -1 to +6. The VWSI has only registered an end of week reading of +6 or higher five times since 1998, with four of those five instances seeing a significantly higher VIX over the next few weeks.

I’ll offer up one additional factoid to think about. Consider the current investment climate and consider also that at its present level, the VIX sits a mere 0.07 above its 17+ year lifetime mean. To my thinking at least, the VIX is once again looking like fairly cheap portfolio insurance…

(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 +6 I favor a semillon. This often overlooked varietal tag teams with sauvignon blanc to form the white wines of Bordeaux, otherwise known as Graves. The thin skinned semillon grape is particularly susceptible to the Botrytis fungus, which means that semillon is also the primary grape used in the classic dessert wine known as Sauternes.

In the New World, semillon has gained a strong foothold in Australia, where it is frequently blended with chardonnay and sauvignon blanc, but also sold on its own. Last I checked, Peter Lehmann Wines produces four different semillons, with the Barossa Valley one of the most widely distributed in the US. Skipping a little to the east, just this evening I had an excellent 2002 Alpha Domus semillon from New Zealand, but the Kiwis have yet to show the same enthusiasm for semillon that they have for sauvignon blanc. Still, the Alpha Domus effort proves that the potential is there.

It is harder to pick a particular US producer that has built a reputation for semillon, but one to keep an eye on is L'Ecole Nº 41, from the Walla Walla, Washington area.

For more information on semillon, StarChefs.com has a good discussion of the varietal, along with a handful of recommended producers in Australia and South Africa.

Waiting on the Fed; VWSI at -1 Again

By the numbers, last week saw the VIX decline 1.31 or 5% to 24.92, following four days in a row where the VIX opened near the high of the day, then slowly pulled back.

Needless to say, all eyes are on Tuesday at this stage, where the Fed and the VIX will dance on the last day for trading September VIX options and disappointed investors could provide additional confirmation for the current VIX macro cycle.

With the VWSI at -1, held in check largely by the VIX’s relatively low long-term moving averages, I don’t see implied volatility or the VWSI telling us much about what the Fed is going to say, so I’ll be waiting just like everyone else, content to know that it is usually better to try to react than anticipate.

(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 continue to recommend a pinot noir. When I think of California pinot noirs, I immediately think of the Russian River Valley and the nearby small and foggy appelation known as Green Valley. Excellent pinot noir is more the rule than the exception here and four of my favorite producers are Martinelli Winery, Lynmar Winery, Hartford Family Winery, and Dutton-Goldfield Winery.

Further afield, last week, I spoke about three superb pinot noir producers from Anderson Valley: Londer Vineyards, Goldeneye (along with their second label Migration), and Esterlina Vineyards.

For some other suggestions on the pinot noir front, I have another blog with links to a dozen of my favorite producers: Zin and Pinot.

VWSI Ends Volatile Week at -1

Another volatile week is in the books, with no signs of volatility coming to an end. While the NASDAQ and VXN took center stage at the volatility circus this week, the VIX managed a weekly gain of 2.85 or 12.2% to end the week at 26.23 – still the third highest end of week close since April 2003.

With back to back 12+% weekly gains in the VIX, the VWSI has slid from +2 to -1 over the past two weeks. These are still largely neutral readings; I do not consider the VWSI to generate tradeable signals unless readings reach at least +3 or -3.

Just for fun, here are a few VIX simple moving averages:

• 10 days: 23.96
• 20 days: 25.96
• 50 days: 21.30
• 100 days: 17.61
• 200 days: 14.89
• 500 days: 13.66
• 1000 days: 14.28

If you consider that the mean VIX reading for the full 17+ years of VIX data currently stands at 18.92, then any mean reverting activity related to the numbers above is likely to involve a declining VIX. The trick, of course, is to get the time frame right.

(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 pinot noir, probably my favorite of the lighter red varietals. Perhaps the most overlooked of the locations that produce superb California pinot noir is Anderson Valley, a diagonal finger that extends from northern Sonoma to the Mendocino coast. The climate in Anderson Valley is such that it seems everyone is able to make top-notch pinots, but my three favorite producers are Londer Vineyards, Goldeneye (I believe this winery is still on the selling block; be sure to try their second label, Migration, as well), and Esterlina Vineyards.

For some other suggestions on the pinot noir front, I have another blog with links to a dozen of my favorite producers: Zin and Pinot. The content on that blog has been intermittent as of late, but as the markets get back toward some sort of ‘normal,’ I hope to remedy this.

All Quiet on the Volatility Front; VWSI at Zero

It has been six weeks since the VWSI closed at an even zero – the point at which theoretically I should have no opinion about the direction of the VIX over the next week or two. Coming off a week where the VIX traded up 12.8% to 23.38, I am hard pressed to pick the next direction for the VIX, particularly since it has ranged all the way from 15.36 to 37.50 during those turbulent six weeks.

One data point in particular stuck me last week, a report from Bloomberg (with a hat tip to Toro’s Running of the Bulls) that insider buying at financial institutions hit a 12 year high in August.

So while ‘quiet’ on the volatility front is a relative thing, it does seem as if a 30-something VIX gets farther and farther away with each passing week, particularly given the lack of gory headlines involving i-banks, banks, and hedge funds. Unless the next installment of fear arrives quickly, it will almost certainly lack the visceral punch and bloodletting potential that similar news would have had a week or two ago.

Bottom line: don’t be surprised if we see the VIX in the teens in another week or two.

(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 an inexpensive Rhone blend, I continue to recommend: Oakley Five Reds; Robert Hall’s Rhone de Robles and Tablas Creek’s Cote de Tablas Blanc; Wrongo Dongo, the contrarian favorite from Spain; and The Stump Jump (I prefer the white over the red) from Australia. If you are looking for additional ideas, I encourage you check out the Rhone Rangers.

Book pairing: This time only, I feel compelled to add the obvious literary pairing: if you haven’t read Erich Maria Remarque’s timeless classic, you are truly missing out.

Historic Weekly Drop in VIX; VWSI at +2

Last week I toned down my prose a little by noting “we have almost surely seen a top in volatility” and declaring “there is finally evidence that the laws of gravity have been reinstated, at least temporarily.” At least I didn’t hold back in my forward-looking commentary:

“I suspect most pundits will wait until after Labor Day before declaring that it is safe to go back in the water, but I tend to think that excessive caution will likely result in missing out on the first big leg of a post-panic bounce.”

One week does not mean it is safe to announce the resumption of the bull market, but clearly quite a few big players were caught leaning the wrong way as stocks moved up. Starting with the VIX, we saw a record drop of 30.9% from 29.99 to 20.72. This eclipsed the previous record weekly VIX drop of 28.4%, which came in March 1991, just after the end of the Gulf War. In retrospect, this also turned out to be an excellent time to go long the broad markets and short volatility.

The record drop in the VIX has pushed the volatility indicator into a deeply oversold level on a short-term basis, while it continues to remain overbought on a long-term basis. Check out Ron Sen’s blog, Technically Speaking, for a chart of the VIX relative to its 10 and 200 day SMAs. How does the VWSI sort out this divergence? By siding somewhat with the extremes of the short-term VIX readings, where a reading of 31.6% below the 10 day SMA has only happened three times previously (1/91, 3/91 and 12/98.) The bottom line is a VWSI of +2, which is slightly bullish for the VIX, but technically still neutral enough as to preclude a formal directional recommendation.

In the event I fail to blog about this tomorrow, it is also worth noting that the ISEE is flagging record levels of skepticism as well. Readings for this sentiment indicator have been extremely low for the month of August; and an ISEE of 95 of lower tomorrow will mean a new record in the 20 day SMA for this indicator – and contrarian bullish support for a continued bounce in the markets.

It’s no fun being just another cinder block in the wall of worry…

(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 the second week in a row, I find myself happily recommending a classic Spanish varietal. This time around it is albarino, also known as alvarinho in Portugal. Albarino is an excellent summer wine, with a zingy citrus delivery that will remind some of the best of Oregon’s pinot gris. Don’t limit albarino to just one season, though, as it has enough weight and body to be an excellent year round wine, with the high acid content making it an excellent food match. Albarino thrives in Rias Baixas region in northwest Spain. If you find yourself in a chardonnay rut – or even if you don’t – sample whatever your local wine store has to offer. My local wine store has a Burgans Albarino for $10. I am a big fan, as are the folks at winefoolery and elsewhere.

Finally, if you want to have some fun and learn about albarino at the same time, I recommend you watch the upstart Gary Vaynerchuk at Wine Library TV taste four albarinos. (If you really want some over the top wine-related entertainment, watch Gary teach Conan O’Brien how to train his palate.)

Normalcy Again? VWSI at -4

In spite of Warren Harding’s calls for a return to “normalcy” back in 1920, Americans – investors or otherwise – ended up with a decade that was anything but normal.

With the VIX a hair under the magic 30 barrier and Hurricane Dean taking aim at the Yucatan instead of the Texas refineries, we have almost surely seen a top in volatility. That being said, the VIX managed to close up on a weekly basis for the fifth time in the past six weeks, finishing the week at 29.99, up 6% (1.69) from the previous week. Is normalcy really just around the corner? My guess is that it is not too far away. The new high water mark in the VIX is now 37.50, which is the highest reading since October 2002, when the markets were just beginning to bottom, before turning up for the current five year bull run.

The VWSI continues in uncharted waters at -4 this week, but with the VIX already 25% off of the 37.50 spike top, there is finally evidence that the laws of gravity have been reinstated, at least temporarily. As the graphic below shows, the VWSI is now mildly bearish on the VIX, with mildly bullish implications for the overall markets. If you consider the strong possibility that the markets can no longer dwell on options expiration, a Fed with it’s head in the sand, or Hurricane Dean threatening the Texas-Louisiana oil infrastructure, then I suspect the coming week will more likely bring bullish surprises than bearish ones, especially given that it is a relatively slow week on the government data front.

I also suspect most pundits will wait until after Labor Day before declaring that it is safe to go back in the water, but I tend to think that excessive caution will likely result in missing out on the first big leg of a post-panic bounce.

(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 VWSI of -4 comes along only a couple of times each year, so it is a good excuse to get off of the beaten varietal track. Also, it never hurts to diversify one’s portfolio internationally. With those thoughts in mind, I am recommending some tempranillo for a VWSI of -4. Tempranillo is the classic Spanish red grape that has long dominated the wine scene in Rioja and Ribera del Duero.

Americans looking to dive into tempranillo should recognize that the grape is not widely planted in the US and focus instead on Spain, which remains the center of world class tempranillo. For a good introduction to the grape and some affordable entry level recommendations, try Spain’s Early Ripener by Blake Gray in the San Francisco Chronicle. Considering that Spanish tempranillo is comparable in quality and stature to an Italian Super Tuscan, a French Bordeaux, or a American cabernet sauvignon, you should also be amenable to higher price points. Some excellent places to get ideas about premium tempranillos include the 2007 Shanghai Tempranillos al Mundo awards, the San Francisco Chronicle wine competition awards, and the tempranillo tasting notes on Cellar Tracker.

To read more about what is going on with this grape in Spain, I encourage you to check out Tempranillo, a blog about the Spanish wine industry.

The Gravity Defying Dance Continues: VWSI Remains at -9

Last week I talked about how the VWSI was in uncharted waters. Given the events of the past week, I might as well rip up the charts. The current waters can’t be any more uncharted than the financial environment can be ‘more unique,’ but let’s just say that the gap between the historical record and the current situation has widened considerably in the past week.

From a numbers perspective, the VIX jumped 17.2% for the week, moving up from 24.15 to 28.30 and now stands 92% above the close from just five weeks ago. With the futures pointing to a rally tomorrow morning, Friday’s high of 29.84 may turn out to be the high water mark in the VIX for the current upward cycle, but this is by no means guaranteed.

The VWSI finished the week at -9 and now has an almost unthinkable three week stretch of -10,-9, and -9. By comparison purposes, the only other three week stretch of significant negative VIX readings was at the height of the Russian financial crisis in August-September 1998, where the VWSI logged consecutive end of week readings of -6,-8, and -4.

I will have more to say about the uncharted waters of the VIX tomorrow, but suffice it to say that I will be all over VIX puts when the market opens.

(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: Unusual times mean unusual wines. I continue to recommend carmenere as an appropriate pairing for a VWSI of -9. Last week I recommend a Concha y Toro 2003 Terrunyo Carmenere as well as some of the favorite carmeneres listed at Cellar Tracker. For those curious about what American wineries are doing with this rare varietal, I encourage you to read about Dover Canyon’s efforts. I will do my best to see if I can find a bottle of their carmenere so that I can report on it the next time the VIX tries a moon shot.

VIX Spikes to 24.17, VWSI at -10

Thanks to an unusual 1.20 surge from 4:00 – 4:15, the VIX managed to spike all the way up to a 24.17 close on Friday, ending the week up 7.22 or 42.6%. In dollars and percentage terms, this is the type of VIX weekly move that you would expect to see only a couple of time per decade, yet this week’s action does not quite match that of five months ago, when the VIX jumped 7.99 points on a much smaller base and logged a 75.2% gain for the week.

Several readers have asked what these extreme VWSI readings mean. In a nutshell, they mean that a short-term (i.e., 5-10 trading days) VIX mean reversion move is highly likely and tradeable. While this also means that the broader markets will likely move in the opposite direction of a mean-reverting VIX, I tend to focus on the VIX play rather than the broader markets play – at least so far – in this blog.

In terms of historical context, I provided some interesting data for the week of February 27^th that neatly predicted the subsequent unprecedented VIX contraction. I will expand upon this data set by offering up the only instances of an end of week VWSI of less than -6 since the shortened week of September 11, 2001:

• week ending 3/22/07: VWSI of -10…VIX -24.3% the next week
• week ending 5/19/06: VWSI of -9..…VIX -17.0% the next week
• week ending 1/20/06: VWSI of -7..…VIX -17.8% the next week
• week ending 4/15/05: VWSI of -9..…VIX -13.3% the next week
• week ending 9/21/01: VWSI of -8..…VIX -25.2% the next week

Next week may turn out to be the exception to the historical rule, but the odds are stacked heavily against it.

(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: What kind of wine should you drink when volatility spikes and skewers your portfolio? A fortified one, of course! I am specifically talking about port, a wine that Americans often fail to properly appreciate. Port is a complex wine with a complex story that requires more than this small space to tell properly. A good introduction can be found in “A Port Primer Ruby,” by Steve Pitcher. To save you some lengthy research, I suggest you just go ahead and sample something in the $15 range, preferably Fonseca Bin #27 and/or Graham’s Porto Six Grapes. If either of these is a hit, then you should probably sample the slightly more expensive 10 and 20 year tawny ports, keeping in mind the names of Taylor, Dow and Fonseca. As soon as we see another VWSI of -10, I will elaborate on port in considerably more detail. This who catch the port bug are encouraged to take a peek at For the Love of Port to help further your interest.

VWSI at Zero, While VIX Rises to 16.95

With its 16.95 close this week, up 1.80 or 11.9%, the VIX is now perched on its highest end of week close since the week of February 27^th.

The VWSI apparently does not believe that the VIX is unusually high, as the zero reading in the VWSI indicates a neutral bias for the next week or two, lending support to my contention earlier this week that “15.00 now looks suspiciously like a floor” in the VIX and “we are entering a new era of increasing volatility.”

Historians may wish to note that not since the middle of May 2004 has there been a VWSI of zero when the VIX stood at 16.95 or higher. During this period, India’s stock market had its worst drop in 129 years over concerns about the role of communists in a new government, oil prices rose over $40 for the first time in 13 years, conflict between Israelis and Palestinians was intensified, and Abu Ghraib was the headline story in the Iraq war.

Is 15 the new 10? In the coming week or two, I will delve into some possible repercussions of an elevated VIX. In the meantime, consider that from the current level, we no longer need such big percentage moves to see a VIX in the low to mid-20s.

(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 an inexpensive Rhone blend, I continue to recommend: Oakley Five Reds; Robert Hall’s Rhone de Robles and Tablas Creek’s Cote de Tablas Blanc; Wrongo Dongo, the contrarian favorite from Spain; and The Stump Jump (I prefer the white over the red) from Australia. If you are looking for additional ideas, I encourage you check out the Rhone Rangers.

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 at Zero for Fourth Week in a Row

Volatility apparently used the 4^th of July holiday as an excuse to take the whole week off, with the VIX falling 9.3% from 16.23 to 14.72.

It is unusual for the VWSI to register four consecutive weeks of a zero reading (it happens about once a year) and equally unusual to see a zero in eight out of eleven weeks. In the past, this type of flat line consolidation has not generally preceded a breakout in volatility, in contrast to some stocks that tend to trade in an increasingly narrow range before breaking out.

Keep in mind that Alcoa kicks off the earnings season on Monday, so things could change in a hurry.

(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 an inexpensive Rhone blend, I continue to recommend: Oakley Five Reds; Robert Hall’s Rhone de Robles and Tablas Creek’s Cote de Tablas Blanc; Wrongo Dongo, the contrarian favorite from Spain; and The Stump Jump (I prefer the white over the red) from Australia. If you are looking for additional ideas, I encourage you check out the Rhone Rangers.

More Volatility, Yet VWSI Holds Firm at Zero

For the second week in a row, we have seen a significant uptick in volatility, yet the VWSI refuses to move from zero.

The VIX ended last week at 16.23, up 0.48 or 3.0% for the week to its highest weekly close in 3 ½ months. Looking back two weeks, the VIX has now risen a cumulative 2.29 points or 16.4%, with the VWSI holding steady at zero at the end of each week.

For what it’s worth, the VIX futures appear to agree with the assessment of the VWSI, as futures from July ’07 to June ’08 are all bunched tightly in the 16.16 to 16.41 range.

(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 an inexpensive Rhone blend, I continue to recommend: Oakley Five Reds; Robert Hall’s Rhone de Robles and Tablas Creek’s Cote de Tablas Blanc; Wrongo Dongo, the contrarian favorite from Spain; and The Stump Jump (I prefer the white over the red) from Australia. If you are looking for additional ideas, I encourage you check out the Rhone Rangers.