Chart of the Day: VIX versus SPX
I came into the office this morning, and my trading desk started our week by discussing the VIX. We put this chart together comparing the "fear indicator" with the S&P500.
As the chart below shows, the recent lows have been accompanied by very large spikes in fear, as indicated by VIX.
Last week, we had a pretty big sell off -- but the VIX stayed relatively modest. That implies that a firm bottom (heh) -- at least one that is tradable -- has yet to be made.
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VIX versus SPX, 1 year
Chart via Fusion IQ, Bloomberg
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If the VIX were a stock, I would be a buyer . . .
UPDATE: June 24, 2008 8:48am
John Hussman noted in his commentary yesterday, “No Capitulation” that:
“despite the recent weakness, there is a strange “orderliness” to recent market losses – as if investors are convinced that there is some invisible safety net that will keep stocks in a trading range and prevent any sustained price erosion. That complacency may become costly. Still, stocks are somewhat oversold from a very short-term perspective, so again, we can't rule out a fast, furious spike to clear that condition."
Well said . . .
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UPDATE: June 23, 2008 11:48am
I posted this before seeing Felix Salmon's Market Mover post on the following on: Adventures in Technical Analysis, Jim Cramer Edition.
I will respond to this later this week . . .
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Monday, June 23, 2008 | 11:00 AM | Permalink
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Comments
If it is able to be manipulated....it will.
That it did not spike on friday tells you something...
I'd buy here too...too bad I don't need anymore "shorts".....which is really what that is in disguise.
Ciao
MS
Posted by: michael schumacher | Jun 23, 2008 10:59:08 AM
why isnt it a stock? they've ETFd everything else
Posted by: scorpio | Jun 23, 2008 11:02:07 AM
totally convinced that the proliferation of ETF's aids and abets the continued manipulation of the markets. Why else did they grow like weeds in 06-07? May be someone saw something coming??....he he..
and to clarify my above statement of "a short in disguise" I mean at it's present level although I expect another "event" to propel the market up hundreds of points for no reason whatsoever......just like we've had several times this year...I've lost count and track
Ciao
MS
Posted by: michael schumacher | Jun 23, 2008 11:15:57 AM
Long call options = long stock position?
Posted by: PHB | Jun 23, 2008 11:23:21 AM
My put/call chart also shows that conditions we saw at the other bottoms are not present...in fact, today's put call at .78 is downright giddy. Remember also, Citi's Panic Euphoria model recently spiked and has come down a bit.
But market won't crash unless PPT capitulates, which they might someday.
Posted by: Steve Barry | Jun 23, 2008 11:26:35 AM
you can buy calls on the VIX but you have to forecast the volatility of the volatlilty. I've never had much luck with them.
I covered down to 1x leverage on Fri. Think I am going to sit on my hands until Weds afternoon.
Posted by: Vermont Trader | Jun 23, 2008 11:32:47 AM
Since you guys want to get technical, watch these bellwethers about to break major support...JPM, C and FDX.
Posted by: Steve Barry | Jun 23, 2008 11:33:31 AM
Seems that high correlation between members of the index is decidedly less an issue in this SPX downturn than in previous falls. Not good news!
Posted by: Annaen | Jun 23, 2008 11:34:46 AM
I wonder if the VIX is lower because of the perceived "Bernanke PUT"? I think what it means is that when the next bank fails and the FED decides to "sit it out." The market will then realize that there is no more "put." Only then will volatility skyrocket.
- AT
Posted by: Andy Tabbo | Jun 23, 2008 11:39:07 AM
I mentioned PPT capitulation before. What would make the PPT give up and let market crash? Fun to speculate on it. Could only happen if Bush admin gives up on McCain getting elected and wants to tank things for Obama. When would that occur? The polls would say now it looks bleak for McCain. Surely whoever is running the PPT now realizes they are doing much more harm than good. They are probably a big behind the scenes factor promoting moral hazard which led to these massive credit and housing bubbles.
Posted by: Steve Barry | Jun 23, 2008 11:40:49 AM
What I find fascinating right now from a tech perspective is the divergence between big caps like the DIA and SPY vs. Midcap/Small caps like the IWM and MDY...
Too many shorts in the small caps?
Posted by: Vermont Trader | Jun 23, 2008 11:41:09 AM
watching the autos, airlines and banks go to Zero. amazing. wonder how that Saudi so-called prince feels about C making the round-trip from 1992. now that would make me go all jihadi
Posted by: scorpio | Jun 23, 2008 11:45:39 AM
I personally think there will be a rally as the banks are sitting at 10 year lows (down 3% today) and the S&P is flat. They'll get a good bounce and even if nothing else is working -- and as long as oil doesn't plummet -- then that's good for 3-5%. Plus that would get us to the point where 1260ish is broken when the CPI number has the seasonal adjustment work against it, which makes since.
Course there could just be a crash...but that's been a high probability all along.
Posted by: mikkel | Jun 23, 2008 11:58:03 AM
technicals with any financial stock(s) are useless IMO.....you can't account for "help" and they are getting plenty of that already.
The only thing you can game is that once breached they will be defended for no other reason than perception.....
I'm with VT on this....I'll wait until Weds.....
Ciao
MS
Posted by: michael schumacher | Jun 23, 2008 12:03:23 PM
If it may assist aggregated funds are net sellers of volatility since November 2007 with a large compression in February March 2008 They are now reducing their short position to the effect that in stock terms they are still short and building gradually a positive VIX slope since March 2008. It is to be assumed that normal variances may lie ahead.
Net position as computed by Société Générale being the net between open long position and open short position (stock of volatility compression)
The flows being computed with the same method but on a monthly basis.
It is hard to believe that such a consensus can be built through unorganised random diverse strategies.!!!!!
Posted by: Philippe | Jun 23, 2008 12:07:36 PM
The market is starting to believe that it's back half 08 recovery is wrong. This is the time to buy.
We will recover either back 08 or early 09. Early 09 is more likely.
With the housing prices falling this quickly it's a good thing. It means we have severe but short term damage rather than long term slow grind.
I'm buying Ford heavily as I believe people will go back to buying US product and import products will become expensive and US and import quality are now the same (all companies outsource).
I also believe Kerk offered Ford at $8.2 on purpose to make a ton of people buy Ford only left to be holding the bag when more shares were offered than could be bought by the offer. This makes all those people stuck selling that were looking for that greedy fast gain.
Posted by: John Borchers | Jun 23, 2008 12:11:28 PM
What's sad is that in the pending entry from BR on the Felix Salmon piece, I fear he's going to focus on clarifying his views and use of TA, and the issue of Cramer's atrocious lack of accountability will not be addressed.
Posted by: Eric | Jun 23, 2008 12:17:52 PM
>>We will recover either back 08 or early 09. Early 09 is more likely.>>
Not a chance in hell that is going to happen...have you seen the latest home inventory #'s???
Need that as a catalyst as that's how we got there in the first place. I see no large real catalyst (because printing money via the BOJ doesn't count) to allow that to happen.
The reality of that happening is next to none. That does not mean that the I-banks won't cook up a new way to account for money vaporization and make a "profit" from it, hell they already treat diminished liability as one now....
Ciao
MS
Posted by: michael schumacher | Jun 23, 2008 12:39:05 PM
I don't think the PPT is doing much these days as they already know that the wave thats coming is too big for them to chew. In other words, DaBoyz and co have already capitulated. Watch the market going down big time [probably] tomorrow and the rest of the week, then the final crash before july 4th.
Posted by: OldBrokenRecord | Jun 23, 2008 1:02:22 PM
Eric,
One can spend an inordinate amount of time debunking anyone you choose - Cramer, Luskin, Kudlow, etc. -- but that is not how I choose to spend my limited amount of hours and minutes on this earth doing, nor how I want to define myself (discussing other people versus discussing concepts and ideas).
If you wish to start a blog doing just that, by all means, go ahead.
Besides, can anyone match the Cramer takedown prowess of Don Harrold ?
http://www.donharrold.net/
Posted by: Barry Ritholtz | Jun 23, 2008 1:06:41 PM
I don't know if I should laugh or enter my email into Don's "site"....
The scary part is that he's more aware than Cramer.....
Funny stuff though.....
Ciao
MS
Posted by: michael schumacher | Jun 23, 2008 1:17:23 PM
An RBS analyst is talking crash, Lowry's buying/selling pressure numbers are at record (negative)levels and the vix is having a leisurely walk in the park today. What this market needs is a perv in a raincoat.
Posted by: catman | Jun 23, 2008 1:30:24 PM
Don't know what BR's position on TA is. I, too, think most of what is sold as technical analysis is about as reliable as astrology.
One didn't need any charts of the indexes or individual stocks or options to know that the mortgage market was going to collapse and take a large part of the economy down with it, as it did. Or that the dollar was going to tank, as it did and will do again. These are just fundamental calls.
OTOH, valid statistical correlations can exist and can be useful. Clearly, there has been a strong correlation between the low/high VIX and local market tops/bottoms over the past year. I had even attempted to post about it here last week, but got a message that the post set off the spam filter and would be held til reviewed by the BR. I assumed it was suppressed so Barry could steal my idea :)
Don't how BR forms his opinions, but there's no substitute for being smart, well-informed and independent in thought, as he clearly is.
As to the future validity of the VIX, it remains to be seen. I haven't tried to see if it has had predictive power longer term. It may be that the correlation is due to some hedging system that has come into vogue. If it is latched on to by a bunch of people who take very large positions based on the highs and lows of the VIX, it's validity will be distorted. I remember back in the 60's reading about a system using trailing stop orders. Apparently the originator made a lot of money with it, but when a large number of people used it, big market breaks started occuring because so many stops were being triggered. A closer analogy might be a parimutuel betting system that gets publicized and used by too many people. The change in wagers will distort the odds so as to make whatever statistical validity it had no longer correct.
As to the subject of Cramer, I think most of us share similar opinions on him and his bosses.
Posted by: Mike in NOLA | Jun 23, 2008 1:42:55 PM
This indicator will not work this time. People are not as fearful or as erratic as in the past three major correlations. It would take $200 oil next week along with a second catastrophe for the VIX to spike as it has in the recent past. Or it will take a malaise of incredible magnitude to make people terrified of tomorrow.
Posted by: cinefoz | Jun 23, 2008 2:00:15 PM
A drop below 1250 (on the S&P) would likely get the attention of investors.
My take: the S&P will drop down to 1250 (and maybe 1200) before the end of September.
Posted by: DL | Jun 23, 2008 2:02:18 PM
