I'm sure the perma bull market strategists have all but forgotten about the low VIX readings. They are too busy being optimistic about a "second half recovery" and the "productivity boom" to pay attention to any sentiment readings. It's been between 25 and 19 now for 4 months. If you pull up a 5 year weekly VIX chart with Bollinger Bands, you'll see the bands are starting to tighten (just as they have before other major sell offs in the past few years). If you add RSI and MACD to the chart, you'll see how low they've gotten. The lowest RSI readings in 5 years! Major complacency.
I started my put collection yesterday... added a bit this morning. Octobers should do the trick?? Happy trading all
http://www.forbes.com/2003/06/18/cz_lm_0618soapbox.html Nice part about the "implications" of low VIX readings...
"The fact that everyone agrees on the contrarian interpretation of a $VIX "buy" signal does not mean that they agree on any other $VIX interpretations. Specifically, what does a low $VIX mean? Those who only look back three years or so will tell you that a low $VIX precedes a declining market. That is not true when one considers a longer history (even assuming one knows what "low" is). Other, more astute $VIX analysts will tell you that when $VIX bottoms out and begins to rise, then the "sell" signal should be triggered. While this is a better interpretation than the previous one, it's still not correct."
Absolute numbers are meaningless. You need to watch how the VIX moves in relation to various moving averages, RSI, etc.
FRIDAY a.m. August 22, 2003 Defending the VIX by David Nichols Since I feature the VIX so heavily in my work, it's only appropriate that I come under fire when the VIX itself is not doing so well as a market timing tool. This has been happening a bit lately, but I'm not complaining. Every really valuable indicator has to fall by the wayside once in a while in order to replenish its store of value. Right now, it's the VIX's turn. I'm also getting lots of comments about how the VIX "can go down into the teens, and stay there for a long time". That's true, I guess. Anything is possible. More specifically I'm hearing lots of comments about how the VIX can go to 12, and live down there for years, as it did in the early 90s. All I can say to that is: Does the current world resemble the early 90s? Are we about to accelerate into the biggest financial bubble of all time? Personally I feel it's a major analytical trap to compare what happened in the biggest, wildest bull market of the century (the 90s), to what is happening in its bear market aftermath. If anything, we should be looking for indicators to do the exact opposite of what they did in the bull market. That is, if the VIX lived in the low teens for years on end during the bull, then we can not realistically expect a repeat performance of that, but rather the VIX to live in a very high range for years at a time. I'm also perfectly happy to be the last man standing that thinks the VIX in the teens is a major, juicy shorting opportunity. That suits me fine. That's exactly what is needed, in fact. When somebody brings up how the "VIX can go to 12" or "everybody knows about the VIX, so it doesn't work anymore" (I got a lot of that one in February 2001), I just smile and nod my head sympathetically. I'm not going to lose faith in this magical sentiment indicator, because I'll let you in on a little secret. You didn't even need to look at a price chart over the last few years to be the best market timer in the world. All you needed was a daily chart of the VIX. Although it's always, always easier in retrospect, in real-time I actually did manage to rack up 250% cumulative gains trading in and out of the Rydex Dynamic Funds over the last 2 years -- without a single loss -- using not much more than this very chart. It took me a long time to get to a point of such simplicity and clarity. And trust me, I've looked hard at everything. But in the markets, complicated is definitely not better. In fact, the more indicators you look at, the more wiggle room you give yourself to craft a thesis to fit the particular mood you're in -- a mood which usually corresponds very closely to the consensus opinion, by the way. For me, it's much simpler and more effective to just follow the general guideline: "VIX high, buy; VIX low, sell". It works. That's what counts. Is it foolproof? No. But it's pretty darn close. Okay, okay, that's all well and good you're saying -- but the VIX doesn't seem to be working now. It has gone low, and stayed low, as the market meanders to the upside. The answer to this quandary is it's not over yet, not by a long shot. The market always looks and feels great right at the top, when everybody is already on board, and the VIX is under 20, as it is right now. The Bulls can't declare victory and a "new bull market" until they've survived a truly scary test that takes the VIX back up over 30, or even to 40 or higher. If that happens, and the market is significantly above the bear market lows, then we may really be onto something to the upside. But we won't really know what this market is actually made of until we see how that sentiment swing plays out. People so much want to believe in this market. They are practically willing it higher. Money supply growth is just ridiculously high, as the Fed continues to pour as much kerosene onto the fire as possible, hoping something incendiary will spark to life. Inevitably some of this liquidity finds it way into the stock market, but Greenspan and Gang are losing their traction in this department. Money supply has been growing at a staggering rate, yet the market can only churn and grind. That's definitely not bullish. Also not bullish is the action in commercial paper, which the Fed tracks scrupulously every day on their web site. That blue line is non-financial commercial paper "outstandings", and it's just been in free-fall since the bear market started. It's actually at the point now where companies are only borrowing as much as they need to fund ongoing operations, in spite of the Fed's massive stimulus. We're still waiting for that blip up in corporate spending, but it's just not happening. So we're left with a market that everybody loves and a VIX under 20, and I'm hearing early reports that short interest figures continue to drop (we'll get more information on this soon from Phil Erlanger, who has all the data on this...) This is a main reason why the market can't really take off to the upside -- the bears are all blown out. Maybe the market needs to cleanse the decks even more fully by a trip up to SPX 1040 with further erosion on the VIX, but that's not going to change the eventual outcome, which involves a scary trip back down and a soaring VIX. That's just the way it works. Sentiment Dashboard by Adam Oliensis
Hi jbtrader, you are saying that you recognized that the VIX is very low compared to the past history. In additon you have the impression that the volatility of the VIX is getting lower. What is you plan to use this information for your future trades?
Remember to buy the dip later on. I forgot this last time, was waiting for a 90/90 day like an idiot without his savant.
I agree the absolute level of the VIX doesn't give you buy or sell signals. It's all relative. About a month ago I had a nice position in sept 90 puts on the dow at around 2 3/4 - 3 dollar cost basis. I still have those. I think it's highly probably that I can at least get back half my money on those (DOW 8850 by the 3rd week of Sept). I also added OCT and Jan 04 puts to buy some time. Successful investing is about putting the odds in your favor. Sept is historically the worst month for the market. Oct isn't a picnic either. This isn't a 100% lock, no trade is, but I think the odds favor a decline. Why I still have faith in the VIX: Emotions are determined by real money, not rumor or word of mouth. Sentiment has always been an important factor in trading. "Buy when there is blood in the streets, sell when the trumpets play". Just because everyone knows about the VIX doesn't mean people follow it. You could have made the arguement last year that "everyone knew about it", therefore it is invalid. Yet look at the people who paniced and sold when it reached 50. Everyone knows about it in theory, but when cold hard cash is on the line, emotions over ride following any indicators.