Bernie Schaeffer’s “Monday Morning Outlook” is generally an excellent perspective for any trader to contemplate going into the trading week. This week’s commentary is one of the better ones, as Schaeffer looks at a variety of data points to consider whether or not the markets may be putting in a bottom. One of the themes that Schaeffer takes up is a sense of concern starting to overtake the recent investor complacency. Schaeffer cites the VIX as an example of continuing complacency in his remarks and in so doing goes on to make a potentially more interesting claim that he and his colleagues believe the VIX action represents the maneuverings of the smart money:
“One dissenter to this growing crack in the complacent armor was the VIX, which was little changed even while the market moved defiantly into losing territory. In fact, the supposed ‘fear barometer’ has shown little signs of alarm for a few weeks now, preferring instead to shuffle sideways. It has yet to make a significant move above the 30 level or come within sniffing distance of its mid-August peak.
However, the VIX action presents some very interesting possibilities. Its continued inability to move below the 32-week trendline is bearish, as we've pointed out before. But I wonder whether the fact that the November spike has fallen short of the August spike might actually be bullish in its implications, in the sense of a ‘non-confirmation’ of the pullback, rather than the conventional view that this is a bearish indicator of complacency. This interpretation would only make sense if you felt the VIX represented smart money, an evolving conclusion that we at Schaeffer's have reached over the course of this year [emphasis added]. Note that you could consider the VIX spike in the first quarter to be a non-confirmation relative to the spike in the second quarter of 2006, as it fell shy of the 2006 peak. The spike to higher VIX highs in August then ‘confirms’ the bearish trend, and by that reasoning (assuming the VIX has, in fact, peaked) the current spike is another non-confirmation with bullish implications.”
Setting aside the caution-complacency issue for the moment, I find it interesting that Schaeffer believes the VIX is the footprints of the smart money. I am slowly coming to the same conclusion myself and will attempt to address this issue a little more scientifically in this space in the future.
Is there a portfolio manager who doesn't utilize options as a hedge to their normal trading activity?? I would think most likely not by which case the VIX serves as a nice way to trace their tracks.
ReplyDeleteI also subscribe to Bernie and greatly respect his wisdom. However, I and am convinced he is a PERMA bull call buyer. Every solicitation/email alert i get touts his call recommends. I have yet to be turned on to a put recommendation in the last 12 months. Not complaining, just saying.
If volatility and liquidity are polar opposites then why wouldnt VIX continue to stair-step higher until the credit crunch/LIBOR spreads/sub prime/flight to safety trades ease?? I think Bernie has too much faith in all the above concerns simply vanishing overnight with another FED cut.
Whats downright disheartening to me is the QQV. I thought the NDX was supposed to be immune to the credit crunch because of their explosive earnings growth and cash flow generating businesses?? Looks like the credit crunch is hitting their clients which has traders on edge about earnings prospects for the "credit impervious" tech sector. Hence, the QQV is sizzling.
I think the easy money days of 'liquidity everywhere' are gone. Volatility slowly marches highward until a resolution to the credit crunch is found.
In the meantime, please keep up your excellent blog!
dowoper8tr
I have been talking about the VIX as a direct measure of institutional measurement since I first started my blog.
ReplyDeleteI think the VXN is even better than the VIX as far as predictive value.
dowoper8tr,
ReplyDeleteI have a hunch that during the extended bull market many portfolio managers were reluctant to drag down returns by spending money for portfolio insurance, which may partly explain why following both the February and August VIX spikes, the VIX failed to return to pre-spike levels.
Regarding the VXN vs. the QQV, I should watch that more closely. It looks like that relationship sometimes tips off some market movements.
F-Trader,
You have indeed had some excellent insights into volatility and a number of other subjects -- and the predictive value of the VXN is clearly one of them, at least in the current/recent market environment.
Cheers, good blogging, and even better trading,
-Bill
Thanks buddy. I guess we'll just have to see if the institutions are right about last week's trading. I have noticed in the past that there are times when the VIX diverges bullishly for stocks and then there is a capitulation trade in which the VIX spikes with a corresponding fall in the market only to see the market climb higher as originally predicted by the market. I think we may be seeing that scenario unfolding...
ReplyDelete