Thursday, November 01, 2007

VIX Jumps and Other Topics for a Bearish Thursday

* Jump in the VIX - We leaped over 25% in the VIX to 23.21, a 20-day high in option volatility. Going back to 2004 (N = 961 trading days), we've had 73 occasions in which the VIX has hit a 20-day high. Two days later, the S&P 500 Index (SPY) has averaged a gain of .33% (43 up, 29 down), quite a bit stronger than the average gain of .05% (480 up, 408 down) for the remainder of the sample. I show only 9 trading sessions since 2004 in which the VIX has risen more than 20% in a single day. SPY was higher on 7 of those 9 occasions two days later. That doesn't guarantee a turnaround in the market, but it certainly suggests that selling into such weakness has not provided traders with an edge overall. Here's another VIX elevation pattern and here's a look at VIX and put/call ratios. Here's a post with more data on volatile VIX patterns.

* Twitter - I've had some very positive email comments re: the latest Twitter postings, including the statistical pattern I posted in the AM and the indicator updates. The latest five Twitter "tweets" appear on the blog home page; the full set are on my Twitter page.

* Tricks of the Mind - Thanks to an astute reader for pointing out this interesting article on how normal brain functions make us see patterns that aren't really there.

* Cognitive Fitness - Thought provoking views from Harvard Business Review and more, compiled by Sharp Brains.

* Chart Reading - Here's a compilation of chart-related posts from Trader Mike. Note that Mike posts trade idea candidates daily. A couple of interesting books on charting have come out lately. One I'm reading currently is from Suri Duddella; nice overview reference of various patterns, with examples.

* Odds of Recession Down? - That and more fine link perspectives from Abnormal Returns.

* Inflation on the Rise - Excellent views on what the numbers are saying from The Big Picture.

* Sector Blogs - I like to point out resources that are unique. Here's the blogroll from InvesLogic, with specialty themes of interest to some traders and investors.

* The Future of Housing - What are the CME housing futures saying about housing prices for the remainder of the decade? Here's a view from Seeking Alpha and Bespoke Investment Group.

4 comments:

es-hmuz said...

Dr Brett,
I have been following your blog for quite some time. I see that you are following:
1. TICK (Cumulative Adjusted Tick 20 period)
2. Market Profile
3. VIX
4. Sector performance.

Wondering how your typical setup/screen looks like when you enter a trade?

Thanks.

Ben Roberts said...

"Going back to 2004 (N = 961 trading days), we've had 73 occasions in which the VIX has hit a 20-day high. Two days later, the S&P 500 Index (SPY) has averaged a gain of .33% (43 up, 29 down), quite a bit stronger than the average gain of .05% (480 up, 408 down) for the remainder of the sample."

Hi Dr. Brett,

Just wondering about the wisdom of using 2004 as the beginning of your sample. Since we know that the VIX tends to make major gains during periods of major market weakness, is this study not simply telling us that buying weakness since 2004 has produced greater than average gains? Can we derive from this the axiom 'buying weakness during a bull market produces greater than average gains'? What if we are no longer in a bull market? Keep up the great blogging.

Ben Roberts
http://fastforwardfutures.blogspot.com

Brett Steenbarger, Ph.D. said...

Hi Es-Hmuz,

I use VIX as a background measure; I monitor ES, NQ, ER2, selected sectors, TICK, and Market Profile continuously. I've posted some setups esp re: Market Delta patterns, but will do more of that going forward if readers would find that helpful. Thanks for the interest--

Brett

Brett Steenbarger, Ph.D. said...

Hi Ben,

Yes, VIX behaves differently across market regimes. In modeling the most recent historical periods, we want to also keep an eye out for objective evidence that those regimes haven't shifted. I do not find, as of yet, significant differences between the current market trending and vol and those from 2004 to present.

Brett