Tuesday, May 09, 2006

A Market That Isn't Looking Complacent

I'm pleased to announce that my new book, Enhancing Trader Performance, is coming along well and will be out this fall.

Here's an investigation that extends a finding from an earlier study. That posting found market underperformance when flat markets were accompanied by falling VIX values, rather than a rising VIX. In that study, I looked at the most recent market day and what happened subsequently. Now we'll look at two-day patterns, given that we've been relatively flat in SPY for the past two days with a VIX that has risen over 3%.

Since March, 2003 (N = 801), when SPY has been up or down within a .10% range over the past two sessions (N = 74), the next day in SPY has been down by an average -.07% (36 up, 38 down). That is weaker than the average one day change for SPY (.06%) for the sample overall.

When the flat two-day period in SPY has occurred during a rising VIX (N = 37), the market has averaged a gain of .07% (19 up, 18 down)--not greatly different from its average performance. When the flat two-day period in SPY has occurred during a falling VIX (N = 37), the market has averaged a loss of -.20% (17 up, 20 down), much weaker than average.

Once again, we see that flat periods tend to be associated with subnormal returns, but that this is particularly the case when VIX levels (investor fear levels) are falling. When investors are more skittish--as they might be prior to the Fed news in the current situation--outcomes are much more normal.

Interestingly, over the past 10 trading sessions, we're up well over 1% in SPY, but VIX levels are higher now than back then. I find this lack of complacent sentiment interesting, particularly given the fact that we're at bull highs in the large caps.