Monday, September 3, 2007

All Quiet on the Volatility Front; VWSI at Zero

It has been six weeks since the VWSI closed at an even zero – the point at which theoretically I should have no opinion about the direction of the VIX over the next week or two. Coming off a week where the VIX traded up 12.8% to 23.38, I am hard pressed to pick the next direction for the VIX, particularly since it has ranged all the way from 15.36 to 37.50 during those turbulent six weeks.

One data point in particular stuck me last week, a report from Bloomberg (with a hat tip to Toro’s Running of the Bulls) that insider buying at financial institutions hit a 12 year high in August.

So while ‘quiet’ on the volatility front is a relative thing, it does seem as if a 30-something VIX gets farther and farther away with each passing week, particularly given the lack of gory headlines involving i-banks, banks, and hedge funds. Unless the next installment of fear arrives quickly, it will almost certainly lack the visceral punch and bloodletting potential that similar news would have had a week or two ago.

Bottom line: don’t be surprised if we see the VIX in the teens in another week or two.

(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.

Book pairing: This time only, I feel compelled to add the obvious literary pairing: if you haven’t read Erich Maria Remarque’s timeless classic, you are truly missing out.


Anonymous said...

When you said: "don’t be surprised if we see the VIX in the teens in another week or two", I believe you based that on the mean- reverting characteristics of the VIX.

However, the question is what "mean" we're using. The last 4-5 years have seen the VIX in the teens, however, many more years before that, VIX was in the 20's and 30's.

I guess it's all relative, depending on what timeframe we choose. What if during the last few years, the VIX was "abnormally" low compared to its long-term historical mean, and is just now starting to return to its more "normal" range, in the 20's?

If that's the case, we may see the VIX stay in this "reverting to the mean" range for a significant amount of time to come.

Bill Luby said...

Hi Dave,

Excellent post. I think you have just asked the $64 million (yes, there's been some inflation over the years) question.

I will probably be posting about this next week, but some quick comments are in order:

1) the lifetime mean of the VIX (going back to 1/90) is 18.92

2) call me crazy, but I track VIX SMAs all the way out to the 1000 day SMA. For the record, the 500 day SMA is 13.66 and the 1000 day SMA (approx 4 years) is 14.28

3) I have talked about VIX macro cycles several times in the past. For the most part, these cycles appear to last 3-5 years. It looks we started a new VIX macro uptrend in February, just as the 2002-07 downtrend was hitting about 4.5 years.

Which mean indeed. I believe several means are at work in the mean reversion equation, with the most important ones being the 10 day SMA and the 20 day SMA, but with SMAs going out to 1000 days having some meaningful gravitational pull.

FYI, in case you missed it, you might enjoy reading a recent post on some of these subjects, "The Return of the Absolute VIX."

Thanks for contributing to the dialogue here.



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