Tuesday, October 9, 2007

ISEE Highlights Froth

Just in case it is not already obvious to anyone who may be an occasional reader, the VIX and the ISEE are my two favorite measures of market sentiment.

Right now the VIX is suggesting that the current market environment is overheated. This is evident in measures such as the distance the VIX is below various moving averages, the VWSI, and the VIX:SDS ratio.

Until recently, the ISEE was a little more prone to fence-sitting, but that changed with yesterday’s 187 reading, the highest single day reading since August 2006. On the heels of that large number comes a wave of call buying this morning that has the ISEE at 270 as of 11:10 EDT. Now it is not unusual to see extreme readings in the ISEE early in the day, when the denominator is low, but what is unusual is to see those extreme readings get even more extreme as the day wears on, such as the ISEE actually jumping up from 257 to 270 during the last 40 minutes. This development bears watching…


Anonymous said...

The "current market environment is overheated" yet all I hear from talking heads is how high put activity is. If puts are indeed being bought hand over fist for protection then perhaps we are back to the laddering phase of mild pullbacks followed by large upside bursts that Bernie spoke of some time ago in explaining the constant bull march the last few years?? No one seems overly bullish lately despite hew highs. Is sentiment lulled into a false sense of doom?

Bill Luby said...

Some good points, dowoper8tr -- or at least some thoughts that are similar to my own thinking.

Frankly, I find that most of the put to call activity that I watch (particularly the ISEE and the CBOE equity put to call variant) has been fairly middling recently, with not much in the way of extreme readings. The ISEE numbers may indicate a turning of the tide toward the type of euphoria that we see in China stocks and other pockets, but not across the equity universe. One or two days doesn't mean much in put to call sentiment, IMHO; I believe you need a longer trend for it to be meaningful.

At this juncture, I tend to be leaning in the direction of a 3-5% correction coming in the next week or so -- more to relieve the pressure of the sharp upward leg than anything else -- followed by a resumption of the bull market.

I do wonder about this bull being a little long in the tooth, but the broad indices need to make a U-turn before I become an intermediate or long-term bear. Until then, everything else is just another brick in the wall of worry.

Good trading,


Bill Luby said...

For another interesting sentiment measure, check out James Montier's Fear & Greed Index (tip of the hat to Barry Ritholtz at The Big Picture)

DrJeff said...

So, for those using Bloomberg, would the VIX:SDS be the same as buying VIX and selling SDS? (As for the Bloomberg reference: I was thinking SDS-F8-VIX-F10 GR to show the ratio).

Bill Luby said...


The VIX:SDS is the ratio of (long) the (cash) VIX to (long) the SDS.

It gets a little confusing because the SDS is supposed to track at the inverse of 2x the SPX. On the other hand, the SSO is the ETF designed to track at 2x the ETF, so theoretically the VIX:SDS should be roughly the same as a ratio of long the VIX to short the SSO.

Hopefully I have not already muddied the waters too much, but what I really want, and what StockCharts.com does not offer, is something that would show the ratio of the VIX to -4.2 times the SPX, since -4.2x is roughly the median relationship between the changes in these two indices.

Unfortunately I have no experience with a Bloomberg terminal, so I can't provide any help on that front.



Unknown said...

are you sure isee was that high? I mean, I also saw it yesterday intraday, but today data points out at high 170.

Bill Luby said...

Hi ales,

The ISEE is reset at the end of each session. Yesterday it trended down slowly toward the end of the session and closed at 175.

Today it is at 104 as of 11:30 EDT...so it is looking more like a two day spike than anything else at the moment.

Data is available at the ISE



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