Friday, January 2, 2009

Schaeffer and Connors: Two Veteran Perspectives on the VIX

While I wait to see if the VIX might find a new floor in the 30-35 range, I notice that two veteran VIX aficionados, Bernie Schaeffer and Larry Connors, are talking about their current views on the VIX.

Starting with Schaeffer, in Examining the Technicals of the CBOE Market Volatility Index (VIX), the veteran options strategist outlines several of the factors that are influencing his recent thinking on the VIX. Republished from a mid-December subscriber note, Schaeffer’s thinking includes:

  • Possible support at the ‘half high’ level of the VIX (50% of the November peak of 89.53)
  • The importance of round numbers (a VIX of 50)
  • Long-term moving averages (40 week and 80 week)
  • Sector correlation (especially commodities vs. financials)
  • VIX relative to SPX historical volatility (20 day HV)

David Penn, Editor in Chief at Connors’, weighed in earlier in the week with In Defense of the VIX, a response to a Bloomberg article by Jeff Kearns and Michael Tsang. Penn favors a relative VIX to an absolute VIX and cites the familiar Connors 5% rule, in which investors should be long the market when the VIX is 5% or more above its 10 day simple moving average and short when the VIX is 5% or more below the 10 day SMA. For those who are interested in learning more about the Connors approach, Short-Term Trading Strategies that Work has some interesting ideas and is a worthy successor to How Markets Really Work: A Quantitative Guide to Stock Market Behavior.


Anonymous said...

The vix is currently 13% below its 10 day sma.

Bill Luby said...

Yes...and the VIX:VXV ratio is at 0.92.

Here is the interesting factoid: the VIX is 8% above the 20 day SPX HV, but 44% below the 30 day SPX HV (coming into today).

Still, on balance I'm bearish at the moment, even with all the cash sitting on the sidelines.

Pete Birchler said...


My data shows a sharp VIX reversal into the close today. I have seen mentions of this type of behavior before when there is no corresponding reversal in the SPX. Could you give any perspective on the importance (or lack of)of this in upcoming posts?

Anonymous said...

VIX spiked during last 3min of trading which indicates to me that some big players went short SPX futures contracts in a big way.

Is that an accurate take?


Anonymous said...

bill what does your comment on vix 20 day and 30 day hv imply ?

Anonymous said...

Hi, I'm rathyer new on this blog, i would like to submit the following comments about yesterday's situation. First, the ratio nova/ursa extremely high:

Now, looking at VIX, we have a strong reversal in the last minutes close to a several months minimum:^VIX&t=1d&l=on&z=m&q=l&c=

All this after a strong increase of stock indexes with very tiny transaction volumes and a ratio Put/Call which goes close to its one-year minimum,

My question would be: does all this constitute a reliable signal for a market correction ?

Thanks for reading and happy new year to everyone!

Anonymous said...

We will probably see a correction soon after this rally. Thats not a difficult prediction to make.

I wonder if the trend has changed for 2009.

My guess is, we will trade sideways, with volatility spikes all over the year.

There's simply not enough fuel to pump a bull market, and the fed is unlikely to let everything melt.

Worst case scenario ? Commodities pick up on weak dollar and higher inflation, real consumption down : stagflation.

Bill Luby said...


Good comment. It is something I will look to address in the future. As an aside, there are two flavors of this divergence, one that happens prior to the NYSE closing and another that happens in the 15 minutes after the NYSE closes and before index trading ends. Yesterday we had spikes in both time frames.


I think you are at least partially correct here. The VIX spike usually means massive SPX front month put buying, but that isn't always the case.

Anon 1,

The large spread between the 20 day and 30 day HV of the SPX is very unusual...and is the result of the length of the lookback period, with the 30 day still picking up some volatile days before the holiday volatility crush.

While I would expect this to be a bearish development, my research is more neutral on the subject.

Anon 2,

Thanks for the heads up on the Nova/Ursa extremes, which I don't follow like I used to.

Regarding fuel, there is not a lot of it and it cannot be leveraged like it once was, but a large portion of it is on the sidelines.



Anonymous said...

I am the last anon to comment.

Bill, i agree there is a lot of capital waiting to get in.

But we should see yields increasing in TIPS and a rally in Baa corporate bonds before calling a new equity bull trend.

Those 2 instruments lead the 2002 recovery in equities.

So far, 5 year tips are pricing almost zero inflation, and corporate bonds are at extreme low levels.

keep up good analysis !



Bill Luby said...

Hi Bob,

Thanks for some excellent input.

Even with Friday's breakout, I still think we are range bound for a while longer. I may be one of the few with a short-term bearish bias at the moment.

Cheers and Happy New Year,


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