Sunday, April 8, 2007

VWSI at Zero Again

The VIX Weekly Sentiment Indicator (VWSI) is back at zero for the second week in a row, which is not unusual. In fact, over the long term, the VWSI should generate a zero reading approximately 40% of the time and fall in to the +3 to -3 ‘neutral zone’ approximately 80-90% of the time. When it comes to trading the VIX, patience and discipline are absolute requirements for high percentage and high expectancy trades.

On the price patterns front, the VIX fell 9.6% this past week, barely bringing an end to the five week double digit pendulum of price swings we noted last week in this space, but continuing to print an intriguing pattern: +75%; -24%; +19%; -23%; +13%; and -10%.

Speaking of intriguing patterns, the 90,000+ open interest for the April 11 and 12 VIX puts suggests that someone is staking large money on a continued contraction in volatility.

(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: The official wine pairing for a VWSI of zero is a Rhone blend. More broadly, it is any affordable and enjoyable red or white that works as an everyday wine. This week I will offer up an inexpensive version of a popular Rhone varietal, the broadly advertised and surprisingly drinkable 2005 Wrongo Dongo. While the label is short on information, this wine is from the Jumilla region of Spain and consists primarily of mourvedre, blended with some cabernet sauvignon and merlot. This is an easy drinking wine, but it has enough spice and backbone to stand up to those hard to pair ethnic foods. I found it locally for $7.99 and it can be had for less on sale. If you make money on one side of the market while everyone else is losing money on the other side, what could be more appropriate than to open a glass of Wrongo Dongo and drink to your contrarian success…

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4 comments:

  1. AnonymousApril 10, 2007 at 8:52 PM

    I'm not sure I understand the meaning of the indicator. Are you saying that the Vix is bullish, meaning that the VIX index itself will go up within 1-4 weeks or are you saying that the significance of the VIX indicator is bullish meaning that the market's outlook 1-4 weeks time is bullish?

    Thanks

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  2. Bill LubyApril 10, 2007 at 9:32 PM

    Hi babak,

    The intent is the former, meaning that the 'temperature gauge' is supposed to measure the future movement of the VIX, not the broader markets. This is what the fine print just below the temperature gauge and before the wine pairing attempts to resolve with the disclaimer "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."

    I apologize for any confusion. The VIX world is often turned upside down and that requires a clarity of thinking and writing that sometimes escapes me.

    FWIW, I did attempt to sort this out when I initially introduced the VWSI back in February. That post may add a little context to what I said above.

    Cheers and good trading,

    -Bill

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  3. AnonymousApril 11, 2007 at 10:43 PM

    ah, ok. Thanks for the explanation.

    if I may suggest, always express an indicator in terms of its implications for the broader market, not the indicator itself.

    99% of people key off the general market/sectors/stocks not the vix or other indices (even be they tradable themselves)

    Cheers

    ReplyDelete
  4. Bill LubyApril 12, 2007 at 2:19 PM

    A good reminder, babak. Sometimes spending so much time on the VIX is like walking around in a universe that is upside down.

    Maybe I should start a blog on the QID and all those inverse funds, so at least I can be consistently looking at everything upside down, like a bat hanging in a cave...

    ReplyDelete