More Sideways VIX and VWSI Action While ISEE Plummets

From a volatility perspective, 2008 continues to unfold in a curious manner. The markets are decidedly bearish – and even when they briefly recover or drift sideways, the doom and gloom headlines continue to cast a long shadow over investors’ expectations about the markets going forward. The VIX, on the other hand, hardly seems to care, registering an increase of 1.08 over the last seven weeks. The same is true for the VWSI, which has treaded water in the +3 to -3 range during this period.

Last week was more of the same. The VIX dropped 2.99 (10.7%) to 25.02. The VWSI moved more significantly, from 0 to +3, but the +3 reading from the end of the week is still consistent with a neutral outlook.

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 is on tap in his 3-Day-Weekend Linkfest!

In the realm of interesting market sentiment data, I continue to be most interested in the ISEE, which ended the week with several record low readings. This is normally a bullish contrarian indicator, but as I have noted here on several occasions, the divergence with the volatility indices is a bearish signal.

(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 previous VWSI readings of +3, I highlighted sauvignon blancs from Cloudy Bay and the Marlborough region of New Zealand, as well as some excellent California producers whose sauvignon blanc can be had locally for $10 or less: Bogle; Chateau St. Jean (where it goes under the fumé blanc moniker); Concannon; Kenwood; and Sterling. More recently, I was impressed by a complex sauvignon blanc, with a little bit of oak, from Gary Farrell Vineyards. Their 2005 effort can be had for about $25; for my money, it knocks the socks off almost all of the chardonnays in that price range.

Finally, for an entertaining (think the mannerisms of Joe Pesci and Woody Allen blended with the enthusiasm of Jim Cramer) and informative look at sauvignon blanc, I encourage the reader to sample Gary Vaynerchuk's "Sauvignon Blanc Taste-Off" on wine library tv.

VWSI Holds at +3 Pre-FOMC

Last week the VIX fell 2.06 (9%) points to 20.85 after briefly trading below 20 for the first time since November 1^st.

Volatility has a tendency to spike up dramatically, but rarely does it decline in the same dramatic fashion. In fact, the successive weekly drops in the VIX 11.7% and 9.0% marks only the third instance since the March 2000 market top that the VIX has fallen at least 9% for two consecutive weeks. For mean reversion aficionados, the last four times the VIX has fallen at 9% or more two weeks in a row, in the subsequent week the VIX has changed +40%, +6%, +19%, and -3%.

While my portfolio is leaning in the bullish direction at the moment, the VWSI is holding steady at +3, a marginally bearish signal for the overall markets.

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:

• December Linkfest: Week in Review
  
  
• December Linkfest: Week in Preview

While I wait for the Fed to make a decision on rates, I am in the process of reading Alan Greenspan’s The Age of Turbulence – an excellent read so far. One of the recurring themes in the book is how the resilience of the economy always seems to exceed his expectations. For more on the Fed, try my Fed Links.

(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 previous VWSI readings of +3, I highlighted sauvignon blancs from Cloudy Bay and the Marlborough region of New Zealand, as well as some excellent California producers whose sauvignon blanc can be had locally for $10 or less: Bogle; Chateau St. Jean (where it goes under the fumé blanc moniker); Concannon; Kenwood; and Sterling. More recently, I was impressed by a complex sauvignon blanc, with a little bit of oak, from Gary Farrell Vineyards. Their 2005 effort can be had for about $25; for my money, it knocks the socks off almost all of the chardonnays in that price range.

Finally, for an entertaining (think the mannerisms of Joe Pesci and Woody Allen blended with the enthusiasm of Jim Cramer) and informative look at sauvignon blanc, I encourage the reader to sample Gary Vaynerchuk's "Sauvignon Blanc Taste-Off" on wine library tv.

VWSI Rises to +3 as Volatility Wanes

The VWSI last hit +3 just eight weeks ago and prompted the headline VWSI Slips to +3; Pressure Builds for Correction. That correction arrived, but the bigger question is whether it is going to be taking a seasonal vacation this year. I suspect that this will not be the case and December will have more than the usual amount of fireworks, so I will be long dry gunpowder.

With a drop of 3.05 points or 11.7% to 22.91, the VIX had its lowest end of week close in five weeks, but I wouldn’t necessarily read too much into these data points. Ultimately it is what the markets do at major support levels that will determine how volatile we are going forward and not volatility that will wag the dog.

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:

• December Linkfest: Week in Review
  
  
• December Linkfest: Week in Preview

Looking ahead, for those with an interest in the COT report, note that the commercials have been getting long volatility as of late. While the track record of this group is not great, it is better than most, so their actions bear watching.

(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 previous VWSI readings of +3, I highlighted sauvignon blancs from Cloudy Bay and the Marlborough region of New Zealand, as well as some excellent California producers whose sauvignon blanc can be had locally for $10 or less: Bogle; Chateau St. Jean (where it goes under the fumé blanc moniker); Concannon; Kenwood; and Sterling. More recently, I was impressed by a complex sauvignon blanc, with a little bit of oak, from Gary Farrell Vineyards. Their 2005 effort can be had for about $25; for my money, it knocks the socks off almost all of the chardonnays in that price range.

Finally, for an entertaining (think the mannerisms of Joe Pesci and Woody Allen blended with the enthusiasm of Jim Cramer) and informative look at sauvignon blanc, I encourage the reader to sample Gary Vaynerchuk's "Sauvignon Blanc Taste-Off" on wine library tv.

VWSI Slips to +3; Pressure Builds for Correction

The word ‘correction’ implies that something is wrong that needs to be corrected. Even though I spent a good portion of last week on the wrong side of the markets, that doesn’t make the markets wrong, it merely makes me wrong.

Still, the persistent high positive numbers registered in the VWSI over the past three weeks is unprecedented, which is part of why I have been wrong side of the market. While the VWSI and VIX are excellent short-term indicators, they are far from omniscient.

Strictly by the numbers, the VIX registered its fourth consecutive substantial weekly drop last week, losing 1.09 or 6.1% to end the week at 16.91. This is the lowest end of week reading in three months and raises the question of where the VIX will ultimately find a bottom. I recently attempted to answer this question; and Adam Warner at Daily Options Report had some similar thoughts on the subject.

(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 previous VWSI readings of +3, I highlighted sauvignon blancs from Cloudy Bay and the Marlborough region of New Zealand, as well as some excellent California producers whose sauvignon blanc can be had locally for $10 or less: Bogle; Chateau St. Jean (where it goes under the fumé blanc moniker); Concannon; Kenwood; and Sterling. This time around, I recommend an elegant, complex sauvignon blanc, with a little bit of oak, from Gary Farrell Vineyards. Their 2005 effort can be had for about $25; for my money, it knocks the socks off almost all of the chardonnays in that price range.

Finally, for an entertaining (think the mannerisms of Joe Pesci and Woody Allen blended with the enthusiasm of Jim Cramer) and informative look at sauvignon blanc, I encourage the reader to sample Gary Vaynerchuk's "Sauvignon Blanc Taste-Off" on wine library tv.

VWSI Lifts to +3

Those who read this segment on a regular basis have no doubt probably determined that following the VIX Weekly Sentiment Indicator (VWSI) is a little bit like undertaking a police stakeout: lots of waiting around for a chance to be tipped off to something significant – that may or may not be just around the corner. You never know when something important is about to happen, so it is important to pay attention and be able to react quickly to what develops. After six relatively quiet weeks, we saw the needle on the VWSI move from zero to +3 on Friday. I’m not ready to say that this is the calm before the storm once again, but the next two weeks should certainly be watched closely for any signs of returning volatility.

(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: The last time the VWSI hit +3, I introduced sauvignon blanc as an appropriate wine pairing and recommended that any aspiring sauvignon blanc aficionado start their investigation into this varietal with Cloudy Bay and the Marlborough region of New Zealand. This time around, I offer up a handful of consistently excellent California producers whose sauvignon blanc can be had locally for $10 or less: Bogle; Chateau St. Jean (where it goes under the fumé blanc moniker); Concannon; Kenwood; and Sterling.

Finally, for an entertaining (think the mannerisms of Joe Pesci and Woody Allen blended with the enthusiasm of Jim Cramer) and informative look at sauvignon blanc, check out Gary Vaynerchuk's "Sauvignon Blanc Taste-Off" on wine library tv.

VWSI at +3

After several weeks at zero, the VIX Weekly Sentiment Indicator (VWSI) is once again showing a directional preference with the current +3 reading. For those who may skip the fine print below the graphic, this means that I am officially neutral, but borderline bullish, in the direction of the VIX over the course of the next 1-4 weeks. Without trying to sound like a two-handed economist, this also means that history and statistics are on the side of the VIX moving up from these levels, but that the edge is not significant enough to warrant my taking a long position in the VIX at this time.

Also, while I use the VWSI as a trading signal for trading the VIX and not the broader markets, it is still reasonable to interpret the a VWSI as suggesting that the markets are likely to trade sideways to down in the next few weeks.

For the record, the VIX needs to drop another point or so next week before I would start buying calls.

(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 recommend a sauvignon blanc. Traditionally the primary white wine varietal of Bordeaux, sauvignon blanc floundered for years in the US as “the other white wine grape” for those who decided they needed an occasional break from chardonnay. Robert Mondavi began calling sauvignon blanc by the name of fumé blanc in 1968 and helped to increase the prestige and awareness of the varietal to some extent, but also created considerable confusion among the largely unsophisticated American consumers of the era.

In the 1980s, sauvignon blanc experienced a renaissance with the help of innovations in New Zealand that involved fermentation in stainless steel tanks instead of the traditional oak barrels and resulted in a refreshing, fruit-forward wine that bore only a passing resemblance to the lemony, grassy efforts that were common in the US. In the last two decades, the fruity stainless approach has come to dominate much of the new production and has helped to restore the reputation of the varietal and dramatically increase demand and acres planted.

Thom Elkjer offered up a summary of the recent history of sauvignon blanc in his “The Many Faces of Sauvignon Blanc” article in the San Francisco Chronicle back in 2004. His assessment still holds up well today. Elin McCoy provides a current evaluation of the grape, along with some suggestions, in “Food-Friendly Sauvignon Blanc Wine Sheds Its Underdog Status.”

In terms of a specific recommendation, you might as well start with a Marlborough sauvignon blanc from New Zealand from the winery that played the biggest role in kick-starting the Kiwi sauvignon blanc revolution: Cloudy Bay.