Muted Reaction from VWSI as Markets Drop

The US markets sold off in dramatic fashion last week, with critical technical support levels failing to hold in a number of key indices, including the tech heavy NASDAQ Composite and NASDAQ 100, as well as the small cap Russell 2000. For a change, the damage in tech stocks was greater than it was in the SPX, where financials continue to be the most highly weighted sector.

As I chronicled on Friday, this has been a “low fear selloff” even when one focuses on the volatility index of the hard hit NASDAQ 100, the VXN. In terms of the VIX, the reaction has also been comparatively mild. Last week the VIX rose 3.20 points (15.4%) to 23.94. While this is the highest end of week close in six weeks, an SPX drop of 4.5% typically triggers a rise of about 19% in the VIX, so a 15.4% rise has to be considered a lackluster move relative to market conditions.

Consistent with a lackluster VIX in the face of considerable selling, the VWSI dropped only to -3, suggest a slight mean reverting bias going forward.

As is my weekly custom, for a survey of the best in current thinking about the markets, Barry Ritholtz at The Big Picture sums up the week that was and the week that will be in his Linkfest 2008 Review/Preview.

Looking ahead, it is worth noting that the two consecutive weekly jumps of 10% or more in the VIX has only happened six time since 9/11 – and the last five of those have seen the VIX fall in the subsequent week. After two weeks of 12.3% and 15.4% gains, I would not be surprised to see the VIX pull back a little in the coming week.

(Note that in the above temperature gauge, the "bullish" and "bearish" labels apply to the VIX, not to the broader markets, which are usually negatively correlated with the VIX.)

Wine pairing: For a VWSI of -3, I continue to recommend a barbera. While Italy produces the best know barberas, Barbera d’Asti and Barbera d’Alba, it is fruity, highly drinkable version of this wine from the Sierra Foothills that recently tickled my fancy: the 2005 Renwood Sierra Series barbera. If you are looking for a different varietal to add to your list of everyday reds, seek this one out. For only $9 at my local wine store, it’s a bargain and a great change of pace.

If you are interested in an entertaining and informative look at Italian barbera, I encourage you to check out Gary Vaynerchuk at Wine Library TV, with The Barbera Episode.

Selloff in Financials Jolts VIX; VWSI at -3

The Fed gave the markets a 0.25% rate cut, but in the 2 ½ days that followed, investors did more selling than buying, pushing the VIX up 3.45 points (17.6%) to 23.01 by the end of the week and marking the highest close in the VIX in seven weeks.

Commercial banks and other financials helped to increase investor anxiety, with Citigroup (C) and Merrill Lynch (MER) causing most of the consternation. For a superb summary of the week that was and the week that might lie ahead, I highly recommend reading up on what Barry Ritholtz at The Big Picture has assembled (I think I’ll make these links a regular feature of my weekly VWSI update):

• Daylight Savings Linkfest: Week in Review
  
  
• Daylight Savings Linkfest: Week in Preview

Turning to the VWSI, the increased volatility helped to push the dial to a VWSI of -3 by the end of the week. The last time the VWSI closed the week at -3 was back in the first week of 2007, when the ‘spike’ to 12.14 initially looked like an aberration, as the next seven weeks saw the VIX close in the 10s and low 11s. Of course, everything hit the fan on February 27^th and it has been a different investing environment ever since. I have no reason to predict that the current -3 reading may come at a similar juncture, but it is always instructive to look back at recent history and try to imagine how the current market lens differs from the already outdated one.

(Note that in the above temperature gauge, the "bullish" and "bearish" labels apply to the VIX, not to the broader markets, which are usually negatively correlated with the VIX.)

Wine pairing: For a VWSI of -3, I suggest a versatile light red wine. No, not a Beaujolais (even though another Beaujolais nouveau release date is soon approaching) or the gamay grape behind the wine. No, not a pinot noir either. Instead, I recommend something old and something new: a barbera. This grape is widely planted in Italy and is used frequently as a blending grape, both in Italy and in the United States.

While Italy certainly produces the best know barberas, Barbera d’Asti and Barbera d’Alba, it is fruity, highly drinkable version of this wine from the Sierra Foothills that recently tickled my fancy: the 2005 Renwood Sierra Series Barbera. If you are looking for a different varietal to add to your list of everyday reds, seek this one out. For only $9 at my local wine store, it’s a bargain and a great change of pace.

If you are interested in an entertaining and informative look at Italian barbera, I encourage you to check out Gary Vaynerchuk at Wine Library TV, with The Barbera Episode.