Friday, January 18, 2008

Will a 29.30 VIX Placate the Crowd?

Until the past few days, I did not realize how many investors – or at least pundits – are of the opinion that the market cannot put in a bottom until the VIX spikes. True, the classic market bottom includes a dramatic drop, a spike in volume, and a spike in investor fear to purge even the most stubborn investors of their losing long positions. As I have stated previously, however, I am comfortable in my belief that a VIX spike strongly increases the likelihood of a bottom, but should not be considered a requirement, per se.

Consider, for a moment, that a VIX spike capitulation bottom may be one of those investment phenomena in which one’s individual assessment doesn’t matter. If enough people believe that A is a precondition for B and trade accordingly, just about any A can become a self-fulfilling prophecy.

Back to the VIX spike, we just hit 29.30 on the VIX a moment ago. While some were calling for the VIX to cross 30 to signal a market bottom, it is possible that the current level may be considered close enough to draw in those looking to play the oversold bounce card.

I have chosen to include a weekly chart of the VIX as a framework for evaluating the current VIX spike. It shows that a 20% deviation from the 10 week SMA has proven to be a fairly reliable timing device in the past. It remains to be seen whether that is the case today, but I am not anticipating a VIX spike over 30 between now and the next Fed meeting.


TJF said...

I just heard on Bloomberg a few minutes ago, some commentator calling for a VIX of 40 before the market rebounds.

Trading Goddess said...

My, my! Is that the VIX in your pocket, or are you just happy to see me? ;)

Now... dang it all, Bill! I told you to pack that thing away and never whip it out again! tsk! tsk!

I see I will have to continue on with my stealth plan of undermining you and hoping that performance anxiety gets the best of that awful indicator!

Peace and love and all that.

Now... what are we drinking tonight? Something tastee please to go with broiled scallops over thin pasta in a light cream sauce topped with a few shavings of Parmigano-Reggiano.

Anonymous said...

Hi Bill,

There seems to be a few who feel that with Jan. leaps expiring
this could well set the stage for the hangman to pull the lever, the missing link in all this would be the judge handing down some bad news..
Well Mr. Bill, in the long list of variables,, I guess its the noise we have to focus on...LOL

Have a great evening Bill


MissTrade said...


Take the Chart back a decade to see how volatile it was the last bear market 00-02


TJF said...

To misstrade...just read this on another blog:

"note that the CBOE changed the method it uses to calculate the VIX in September 2003. For starters, they greatly broadened the number of options included in the computation. In addition, the new VIX is based on the S&P 500 option series and not the S&P 100 series, or OEX, as it formally was. This change makes interpreting current VIX readings somewhat tricky because of the relative lack of historical data."

If this is true, is it meaningful to do historical comparisions to previous bear markets?

Anonymous said...

Bill, thanks for helping us all out with your thoughts on the VIX.

Here is a comment on my latest post... What is the story with the VIX? It hasn't exceeded the November high and is nowhere near the August high. Is this is a good sign, a bullish divergence perhaps that volatility is diminishing and the larger trend of the VIX is lower again which tends to favor higher stock prices? Or is this a negative because investors are just not getting it that the stock market is in bad shape?

Anonymous said...

Hi, just read your recent posts about the lack of movement in the VIX. Looks like everyone is puzzled by the VIX at the moment... Also, trading goddess cracks me up.

Anonymous said...

Hi Bill:

Love your site and have been an avid reader.

We may just get that huge spike in the VIX tomorrow. World markets took a huge dump, not seen since 9/11. I've read comments indicating we may possibly see the DOW lose 400-600 on Tuesday esp if we see a repeat performance of the world markets on Tuesday. That could be the washout that everyone has been anticipating.

Bill Luby said...

Thanks for all the comments, everyone.

TG, if it's not too late, I'm thinking a Gavi would be nice...

As for the futures, prospects for tomorrow, the VIX, etc. -- I expect the VIX will open in the 34-36 range and then pop from there. Of course, the Fed could announce something preemptively and take some of the sting out of the open, but it certainly will get ugly. My biggest concern is that if Bernanke does something like cut rates 1.0%, announce buyers for MBIA, Ambac and some of the other bond insurers and the markets pause, then start plunging again. I don't think the Fed has that many cards to play.

Even with a VIX of 40 tomorrow, there is no guarantee that tomorrow will see even a short-term bottom.

This is a good time to have some dry powder.

Cheers and preserve capital,


Ben Bittrolff said...

I've got a clip of a guy going bottom fishing... on the Russell 2000 on SUNDAY night. Can you say f'd?

Be careful all, and good luck.


Anonymous said...

Learn to creep before you leap.

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