Thursday, April 16, 2009

Some VIX Milestones…and a Prediction

It was an interesting trading day not matter how you slice it. When all was said and done the SPX had its highest close since February 9th and moved as close as it has been to its 200 day simple moving average (SMA) since September 26th of last year.

The VIX hit some interesting milestones as well. Today’s close of 35.79 was the lowest close since that same September 26th and the 10 day SMA of the VIX is under 40 (as of yesterday) for the first time since the beginning of October. Elsewhere in the VIX family, the iPath S&P 500 VIX Short-Term Futures ETN, VXX, is now at its lowest level (94.91) since its January 30th launch. Finally, the 10 day historical volatility in the SPX is at a 10 week low (31.18) and 20 day HV just slid below 40 for the first time in 6 weeks.

While the numbers above represent an incremental change in volatility, they also reflect a sea change in investor outlook. Just a few weeks ago it was widely believed that all the banks were insolvent, the economy was not going to turn around until 2010 and if we were lucky, the housing market might bottom before the end of the year.

A flicker of hope here and a flicker of hope there and now suddenly some of the worst case scenarios are being discarded. Perhaps it is just a case of the slowing pace of economic deterioration, but there is always the possibility that things have already started to turn up. After six months of bad news getting worse and worse news morphing into terrifying, even just being able to set aside a couple of the potential disaster scenarios seems to be cause for celebration. But, are the celebrations premature?

Volatility is notoriously difficult to predict, but my personal forecast is for the recent decline in volatility to drop to no lower than the 30-32 level before flattening out, perhaps just in time to meet the 20 month SMA in the (monthly) chart below.

If you have not looked into or traded VXX, next week might be a good time to think about hedging or speculating on an upside move in volatility with this VIX ETN.

[source: StockCharts]


Anonymous said...

I love your blog.
Superb work.
We have see the top or mybe tomorrow we will see high between 874 and 880. Eventually do last shooting will stop most traders. I expect a flat closing for tomorrow possibly to a negative closing.

Anonymous said...

A top or a short term top? My analysis is this rally is far from over. A correction could be in play, but I expect higher highs this summer.

Pankaj said...

Near term top is definitely here today! I expect a nasty pullback on Monday ! We just need any excuse now over the weekend to start the selling process but I agree that with teh mark-to-market accouunting rule change, it is difficult to see what bad news could be soo devastation for sellers to take the market below the march lows..


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