Friday, March 23, 2007

20% Under the 10 Day SMA, Then What?

As usual, Adam Warner of the Daily Options Report has been all over the latest developments in VIX. He was the first to comment on the VIX falling 20% under its 10 day SMA on Wednesday (actually -19.3%) and has added two follow-up stories, most recently this morning, where he draws comparisons to the June-July VIX walkabout from last year.

To recap for those why may be link shy, the VIX has closed 20% below the 10 day SMA on seven days since 1990, which I have grouped into four distinct events (one isolated event and three other events with two separate EOD readings,) as follows:

> 8/15-16/2002
> 12/23/1998
> 3/14-15/1991 (3/13 was 19.9% below)
> 1/21/91 and 1/24/91 (1/18 through 1/25 were all at least 18% below)

The only additions I will make to Adam’s commentary are two graphs that appear in one form or another on these pages on a fairly regular basis: a composite look at all 7 instances, from 5 days prior to 20 days after the -20% reading; and a rather busy graph of each of those 7 instances, color coded by ‘event,’ with the second -20% reading for each event indicated by a dotted line. The graphs, not surprisingly, suggest a possible mean-reverting move over the next 10-20 trading days, but given the small sample size, I would consider their entertainment/voyeuristic value to be higher than any informational value.


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