Several factors have contributed to my taking a more bearish stance today, including a VIX:VXV ratio of 0.92, up from a low of 0.919 a little earlier.
Among the ways to get long volatility in this environment of rapidly falling volatility is VXX, the short-term VIX ETN, which looks like an attractive long at the current at 74.79.
VIX:VXV was on hiatus as a reliable indicator since the whole market debacle began last September, but now it seems to be more consitent and relevant again. I would bet once it drops below .90 we'll see a major market reversal imminently.
ReplyDeletei have studied this and after it dips below .90 it tends to top out in 3-5 days
ReplyDeleteThis ratio hasn't dipped below 0.9 eod since August. I would consider it extended right here. I'm short.
ReplyDeletetony,
ReplyDeleteit got below .90 12/07 ,5/08 and then 8/08 volatility was lower then but it is relative so it was also lower compared to this january. I think you are right on with the shorts but early. I think we will see the vix print 25 and the ratio around mid .80s
anon
IF the ratio does move down toward the mid 80s, it could be done in a matter of days even if the market pullbacks. So the market doesn't necessary have to move up (like today.)
ReplyDeleteRegards, Jimmy
what if current trend is like mid 2003 rally? or 1970, 1975...inflation pressure and high interest rate seems similar to current environment
ReplyDeleteLook like market will break out today. It truly wants to take out every short there is. First phase of this bear was to kill the dumb money, now its killing the smart money, and next it kills the very smart money.
ReplyDeleteBill, do you trade VXX outright or as a hedge?
ReplyDeleteI trade VXX outright and generally prefer to use options as hedges.
ReplyDeleteThe market is starting to look more toppy to me -- and it's nice to see that VXX finally moving up...
-Bill
what is the time frame on your ratio indicator? for instance, once it prints .91, is that a short indicator for the next day or is it a short indicator for a few weeks, or is it a whole new wave lower?
ReplyDeleteI generally treat the VIX:VXV ratio signal as an entry point that I expect to hold for a matter of weeks.
ReplyDeleteWhile I have been more than a little coy about the best exits and full trading systems for the VIX:VXV ratio (I will incorporate some of this into my upcoming book), I consider a two week holding period to provide some high potential trades -- but I also think that setting ratio exit points that may take as much as 2-3 months to trigger as an important aspect of this indicator as well.
I do not think of the VIX:VXV ratio in terms of signaling new waves of a year or more, but as the data set is still young, I am certainly open to new ways to think about the signals.
Cheers,
-Bill
In 2008 (before September) VIX:VXV seemed to be turning in roughly 6 week cycles (i.e. you would see a ~6-week reversal down soon after it closed under .90 then another ~6 week reversal up soon after closing over 1.10). Will be interesting to see if this type of cycle re-appears now.
ReplyDeleteI do not think of the VIX:VXV ratio in terms of signaling new waves of a year or more, but as the data set is still young, I am certainly open to new ways to think about the signals.gw2 gold
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