Sunday, June 24, 2007

All that Volatility and VWSI *Still* at Zero

I must admit that I was a little surprised to discover that the VWSI ended the week at zero once again, given all the volatility on Wednesday and Friday and a 13% gain in volatility for the full week, with the VIX jumping from 13.94 to 15.75.

Just to see if that 13% jump in the VIX and a corresponding VWSI of zero was unusual, I looked back for recent VIX weekly moves of 13%. Sure enough, the last two times the VIX ended the week up 13% (the weeks ended 3/30/2007 and 12/22/06), the VWSI also ended up at zero. Key takeaway: a 13% weekly jump in the VIX apparently tends not to move the needle on the VWSI and does not necessarily have any significance in terms of mean reversion trading opportunities and near-term VIX forecasts.

For comparative purposes, when the VIX jumped 16% two weeks ago, it only triggered a VWSI reading of -1; and a 19% jump for the week ended March 16, 2007 only moved the VWSI to a -2 reading.

When it comes to volatility predictions, about the only thing I feel comfortable predicting right now is that the next sub-10 VIX reading is likely a long way away.

(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.


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