Wednesday, September 26, 2007

VIX Oversold

At 17.48, the VIX is now 17% below its 10 day SMA and 24% below its 20 day SMA, levels not seen since the end of June 2006. While I am not going to predict that the VIX will jump 43% over the next ten days like it did the last time it was this far below the two SMAs, history suggests that the VIX will start moving up from here and that the broader indices, some of which are approaching previous highs, are due for a selloff.

For the record, the chart below show the VIX with respect to its 10 day simple moving average, with the dotted green lines tracking +10% and -10% from that SMA and the solid green lines indicating the +20% and -20% levels from the 10 day SMA. As a general rule, mean reversion is increasingly likely the farther the VIX strays from the 10 day SMA.

I am inclined to think that the new floor in the VIX for the next month or so will be in the 16-17 range, but that is no more than a guesstimate. How the various sentiment indicators act as we test old highs will tell us a lot about the strength of this decidedly long in the tooth bull. Better not to anticipate, but to prepare for several different contingencies – and keep an eye on the VIX for some clues.

Also, apropos of yesterday's commentary, while the DJIA may be +80 at the moment, I note that many of the recent momentum stocks are in the red: BIDU, GRMN, LVS, BCSI, FWLT, MA, FSLR, AAPL, FCX, PCU, CMI, etc. Keep an eye on this development too.


F-Trader said...

I'm not sure how much more of a meaningful dip we're going to get especially with earnings season coming up and many bullish factors like investment manager performance anxiety, end-of-quarter markup, etc.

It seems to me that the VIX and RVX are saying that fund managers are bullish and even dips like yesterday are not causing fears. This is bullish in the intermediate-term at the least.

Unknown said...

Yes, isn't it strange that, on the same day the Nasdaq 100 broke out to a new 52-week high (with a pretty doji), BIDU sold off over 11 points as some (smart?) traders were getting out? It makes one think. :)

Though I stand by my comments yesterday about top-calling being a difficult way to make a living, it looks like you nailed it.

Today's gains in the major indices appears on first glance to be encouraging, but I'm looking at the markedly weak volumes and thinking.... ehhh. Or worse, are we being gamed here? :)

I had assumed you used Bollinger Bands rather than fixed %age bands from the SMA for your mean-reversion calculations on the VIX, but perhaps I was mistaken. Does VIX's volatile nature limit, in your mind, the usefulness of applying certain technical analysis studies to it?

Also, I'm assuming the VWSI reading applies to the VIX, but not necessarily to the VIX futures... would you consider a similar indicator for the front-month futures prices?

Best regards,

Bill Luby said...


Speaking of RVX, options on the RVX and VXN start trading tomorrow.


I follow the VIX with both BBs and SMA deviations/envelopes. For the most part, my analysis and trading favors SMAs over BBs, but the general principles are the same, regardless of the indicator used.

Regarding your broader question, as the VIX is a derivative, I'm not sure how much in the way tradition chart reading analysis is meaningful. Even, for instance, whether basic support and resistance makes sense. I am slowly becoming more liberal in my use of TA vis-a-vis the VIX, but not without some consternation.

With respect to the VWSI and futures, I have thought of several interesting tweaks to the VWSI and may choose to make these public and/or implement them in the near future. With futures, I think there is a lot of useful information in there, whether it gets folded into the VWSI or not. One of the ideas I had was to develop VIX-like indices that look forward 90 and 180 days instead of the 30 days considered by the VIX. Something to think about, anyway.



Ben Bittrolff said...

The absolutely terrible New Home Sales numbers are currently being spun as, "Well, that was BEFORE the rate cuts."

Another example is GM went up on news of the strike because a strike would let GM clear some inventory. Then GM went up on news that the strike was over, because thats good for GM.

Everything is good news. Reminds me of the Tech Bubble days when reality was just irrelevant.

pik said...

Hi Bill,

Can you tell me how you setup the chart for $VIX:SDS in stockcharts? I seem to be missing a setup.


I was wondering is the VIX a lagging indicator. Meaning does it move after the market moves?


Bill Luby said...


I think another significant volatility spike is just around the corner -- and it will catch more investors by surprise than it should.


The easy part first: the VIX generally moves simultaneously in the opposite direction of the SPX, but I will have lots more to say about this subject soon.

Regarding, the VIX:SDS ratio has gotten much more interesting in the past two days as it has slipped under the 100 day SMA. In setting up your own version of this chart, the hardest parts are:

1) the entry for the 'Symbol' in the upper left corner (make it "$VIX:SDS" -- without the quotation marks)

2) to get the SPX chart in the background, go to the indicators boxes below the chart, highlight 'Price' and watch the program fill in the default settings of "$SPX" in the 'Parameters' Box and "Below" in the 'Position' Box. In the 'Position' Box, use the pull down menu to highlight "Behind Price" and you are done. You will now get a default chart of the SPX in the background. If you prefer the area chart I have, click on 'Advanced Options' to the right and enter the following data: 'Style' -> "Area"; 'Color' -> "Gray"; 'Opacity' -> "0.5"

I hope this helps.


pik said...

Thanks Bill

I got the chart setup.

bzbtrader said...

As I am also an avid Vixophile, I tested the Vix Oversold situation in Tradestation with the Strategy Optimizer. I found that over the last 64 months there have been 136 occurrences of the VIX crossing 18% below the 12 day MA. If you bought the VIX on each of those occasions and then sold when the VIX crossed back over the 16 day MA, you would have been profitable on 111 or 82% of the trades. Average holding time for the winners was only 4 days, so when the VIX reverses, it tends to move quickly. I'll be glad to send the TS code (2000i format) to anyone who wants it.

Bill Luby said...

Thanks for the corroboration and data dump, bzb, and for offering up the TS code as well.

FYI, I subscribe to your feed and particularly enjoy the way you manage to weave the VIX into your daily market commentary.

Cheers and keep up the good work,


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