Wednesday, June 13, 2007

Three Out of Four, Unlucky or More

You will have to excuse me for using a title that sounds like a nursery rhyme, but one of the things that I discovered during the Trivial Pursuit fad years was that my childhood was seriously deficient in nursery rhymes.

Fortunately, the condition is relatively benign, but it has been know to manifest itself in my adult life via the occasional lapse into Seuss meter and some silly sounding blog post titles…

But enough about me; volatility is the real star here.

How volatile has volatility been lately?
That’s never an easy question to answer, but with Excel Ginsu, I am always able to come up with at least two or three different answers. Try this one on for size: three out of the past four days have seen changes in the VIX of 13% or more…and this has only happened two other times in the last 15 years. You probably know those other two instances well: February 27 – March 2, 2007 and June 12 – 16, 2006. Each of these instances fell just prior to an important bottom.

Does this mean a bottom is just around the corner? Hardly…but I crunched some more numbers just to be on the safe side. It turns out that these three days out of four volatility clusters are generally associated with intermediate market bottoms and not market topping action. So while this action may look toppy to some, historically it is much more bullish than bearish.

Of course, now I am left to ponder how to best identify a toppy market through the eyes of the VIX. My hunch is that Bollinger band width may be a key here, but I’ll give this one some more thought and report back when I have something of interest to say.


Unknown said...
This comment has been removed by the author.
Agustin said...

Ladies & gentlemen, Bill Luby is on fire!

Bill Luby said...

Thanks, Agustin -- and for the kind words on your blog a little earlier as well.

The good news is that I've hedged my personal conflagration by being long ICE...

Bill Luby said...

With today's fireworks, we are now up to 4 days out of 5 with a VIX daily change of 10% or more in one direction or another. This is not unprecedented, but has happened only three times since the beginning of the VIX data: August 1990; March 1994; and March 2004. FWIW, all three of these instance were great long-term buying opportunities.

DISCLAIMER: "VIX®" is a trademark of Chicago Board Options Exchange, Incorporated. Chicago Board Options Exchange, Incorporated is not affiliated with this website or this website's owner's or operators. CBOE assumes no responsibility for the accuracy or completeness or any other aspect of any content posted on this website by its operator or any third party. All content on this site is provided for informational and entertainment purposes only and is not intended as advice to buy or sell any securities. Stocks are difficult to trade; options are even harder. When it comes to VIX derivatives, don't fall into the trap of thinking that just because you can ride a horse, you can ride an alligator. Please do your own homework and accept full responsibility for any investment decisions you make. No content on this site can be used for commercial purposes without the prior written permission of the author. Copyright © 2007-2023 Bill Luby. All rights reserved.
Web Analytics