Tuesday, February 27, 2007

VIX Spikes While Markets Sell Off: Quick Thoughts

Some things to consider while you watch the red on your screen and contemplate what your next move should be:

In thinking what to expect for the magnitude and duration of the VIX move (and corresponding moves in the broader markets in the other direction) see an earlier post “What to Expect from a VIX Spike.” My comments were not specific to last month, but more to the general case and are still valid in the current market environment. Since the VIX had already moved up 10% over the course of the past two days, we should know a fair amount about the resilience of the current move by early next week.

If the past three months have been “The Shape of Capitulation in the VIX,” then seeing the VIX trade above 13 should change the emotional landscape dramatically.

In other words, even if this VIX spike subsides and the market correction reverses itself, the environment will be different going forward. This is exactly “What My Dog Can Tell Us About Volatility.”

Finally, I was not putting much credence in the observation made by quite a few commentators that the markets could not continue their strong bull move unless the VIX dropped below 10. I still do not believe this is the case, but the recent action may harden the beliefs of those who think that 10 is some kind of a magic number in the VIX.


Unknown said...

Hi Bill.. having trouble with posts on my site. Gold and China. good question. Unless China economy slows dramatically, I don't think China clamp down on stock market will kill gold... might actually turn people back toward buying more gold again. But bigger issue, China likely to remain a big buyer of gold.

Bill Luby said...

Thanks, Jim. I always appreciate your perspective. Interesting that gold is almost back to flat. I've got another eye on copper, off 1.4% at the moment, but it could be a lot worse. I was going to buy some copper if it fell hard, but I'm still on the sidelines.

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