Saturday, July 28, 2007

VIX Spikes to 24.17, VWSI at -10

Thanks to an unusual 1.20 surge from 4:00 – 4:15, the VIX managed to spike all the way up to a 24.17 close on Friday, ending the week up 7.22 or 42.6%. In dollars and percentage terms, this is the type of VIX weekly move that you would expect to see only a couple of time per decade, yet this week’s action does not quite match that of five months ago, when the VIX jumped 7.99 points on a much smaller base and logged a 75.2% gain for the week.

Several readers have asked what these extreme VWSI readings mean. In a nutshell, they mean that a short-term (i.e., 5-10 trading days) VIX mean reversion move is highly likely and tradeable. While this also means that the broader markets will likely move in the opposite direction of a mean-reverting VIX, I tend to focus on the VIX play rather than the broader markets play – at least so far – in this blog.

In terms of historical context, I provided some interesting data for the week of February 27th that neatly predicted the subsequent unprecedented VIX contraction. I will expand upon this data set by offering up the only instances of an end of week VWSI of less than -6 since the shortened week of September 11, 2001:

  • week ending 3/22/07: VWSI of -10…VIX -24.3% the next week
  • week ending 5/19/06: VWSI of -9..…VIX -17.0% the next week
  • week ending 1/20/06: VWSI of -7..…VIX -17.8% the next week
  • week ending 4/15/05: VWSI of -9..…VIX -13.3% the next week
  • week ending 9/21/01: VWSI of -8..…VIX -25.2% the next week
Next week may turn out to be the exception to the historical rule, but the odds are stacked heavily against it.

(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: What kind of wine should you drink when volatility spikes and skewers your portfolio? A fortified one, of course! I am specifically talking about port, a wine that Americans often fail to properly appreciate. Port is a complex wine with a complex story that requires more than this small space to tell properly. A good introduction can be found in “A Port Primer Ruby,” by Steve Pitcher. To save you some lengthy research, I suggest you just go ahead and sample something in the $15 range, preferably Fonseca Bin #27 and/or Graham’s Porto Six Grapes. If either of these is a hit, then you should probably sample the slightly more expensive 10 and 20 year tawny ports, keeping in mind the names of Taylor, Dow and Fonseca. As soon as we see another VWSI of -10, I will elaborate on port in considerably more detail. This who catch the port bug are encouraged to take a peek at For the Love of Port to help further your interest.


dk said...

Thankfully the VWSI gave up the goods with a Port call. These wines are a longtime fav, and 1977 (my HS grad year) has ended many a fine meal at chateau dk.

I must say that this indicator has kept me in Rhones a little too long, so it's nice to sip something a bit more chewy -- but I AIN'T drinkin' no f$&king merlot...

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