Thursday, January 25, 2007

1994 All Over Again?

Apropos of the recent discussion about previous periods of low volatility, Doug Kass at TSCM has an article, Bears Locate a Template for a Crash, devoted to the many similarities between early 2007 and early 1994.

Kass succinctly recalls what happened in 1994:

"A two-month drop of nearly 10% in the S&P 500 Index began at the end of January 1994. The emerging markets collapsed -- Hong Kong's market fell by a third and Mexico by an even greater amount. The bond market got schmeissed -- by year-end, the 10-year U.S. note had fallen 20 points, correcting the entire gain of the previous three years. Finally, the VIX fell back to 1990 levels, climbing from 9 to 24 in only two months..."
Today's 13% rise in the VIX does not necessarily herald the beginning of another sharp shock, but it should be enough to make the bulls a little more skittish for awhile.


Fontimama said...

maybe not so important, but VXO was up 20% today. On one hand VIX/VXO rising so much may mean trouble, but on the other hand this piling into puts may need to be worked off (i.e. market consolidates or goes higher a bit) to take the steam off VIX? We'll see. But if Asia/commodities start selling off again as in May (and rates are already rising), then history will surely be repeating or replicating! :)

Declan Fallon said...

Hi Bill,

Thanks for visiting my blog.

With respect to the VXN - the weekly chart shows a well defined declining wedge, from which resistance was breached on the first week of January. I am liking the 200-week MA as a target (or a 16% gain from here).[s93985352]&disp=P

Best wishes,

Bill Luby said...

I like your chart, Declan -- and your blog too. For the weekly chart, I look at the 39 and 100 SMAs, which are showing 12.84 and 12.67 for the VIX:$VIX&p=W&b=5&g=0&id=p13533099191&listNum=1&a=96050056

I think the VIX goes a lot higher than that this time, something on the order of at least VIX 14.00 and maybe something as ugly as the 20+ readings from May-July '06.

Cheers and good trading,


nodoodahs said...

Hmm ... 1994 all over again? Wasn't 1994 one of the best buying opportunities of all time?

Bill Luby said...

Welcome Bill R. If you're talking about equities in general, going long in early 1994 was a good move only if you had a buy and long discipline, as the Dow, SPX and Nasdaq all fell during 1994, before starting on that road to irrational exuberance in 1995. Of course, buy and hold was still in vogue then...

Interestingly, if you went long the VIX in early 1994, you pretty much went sideways until 1996, when the VIX started to follow the markets upward.

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