As I make mistakes and do things right (I think more of the latter than the former)--meaning gain more experience--I find that going back to my clatch of investing books is helpful. I'm doing so today, outside on the deck of course, it is superlative weather. Rather than do a comprehensive and cohesive piece, I'd rather not spoil you in that manner. Truthfully, if I were to attempt to do that not a post would get written. So, I'll throw a few wisdom (not mine, others!) your way for you to think about.
However, before I do, I would like to recommend a book: The Stock Market Course by George A. Fontanills. It's written for the novice investor, but it is comprehensive in that it is a survey of all of the things that you need to know and think about. From here the person can move to more comprehensive treatments of some of the topical information such as technical or fundamental analysis.
Nevertheless, I found this statement on page 293 talking about the Vix.
Here's a chart of the VIX for the last 10 years. I put the 30 and 20 lines in there as highlight.
This book was written in 2001. Since July of 2004, the VIX has steadfastly been lower than 20. You'll remember that many have talked about the unusual complacency in the market. On Friday, the VIX was just north of 28--still not measuring the level of fear in the market at other intervals. Though this reading is higher than what was experienced last year. And if you were out of the market the entire time that it was below 20, then you missed a big move. So perhaps the quote needs to be recalibrated?
I'm not quite sure what to think about the ranges over that period of time, but I have to wonder out loud if the presence of the short and double short ETF's have had the effect of dampening the VIX. I think that it is worth considering. I've not done any research on the matter, and feel free to bring some references forward. You may wish to use the tinyurl so that long references do not get truncated. Note that I have a button on the the right just above the moon phase.
However, before I do, I would like to recommend a book: The Stock Market Course by George A. Fontanills. It's written for the novice investor, but it is comprehensive in that it is a survey of all of the things that you need to know and think about. From here the person can move to more comprehensive treatments of some of the topical information such as technical or fundamental analysis.
Nevertheless, I found this statement on page 293 talking about the Vix.
"Wall Street has many axioms or cliches. However, there's one I consistently live by, and it makes the VIX level easy to understand: When the VIX is low (<20), it is time to go. When the VIX is high (>30) it is time to buy." (p. 293)
Here's a chart of the VIX for the last 10 years. I put the 30 and 20 lines in there as highlight.
This book was written in 2001. Since July of 2004, the VIX has steadfastly been lower than 20. You'll remember that many have talked about the unusual complacency in the market. On Friday, the VIX was just north of 28--still not measuring the level of fear in the market at other intervals. Though this reading is higher than what was experienced last year. And if you were out of the market the entire time that it was below 20, then you missed a big move. So perhaps the quote needs to be recalibrated?
I'm not quite sure what to think about the ranges over that period of time, but I have to wonder out loud if the presence of the short and double short ETF's have had the effect of dampening the VIX. I think that it is worth considering. I've not done any research on the matter, and feel free to bring some references forward. You may wish to use the tinyurl so that long references do not get truncated. Note that I have a button on the the right just above the moon phase.
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10 comments:
My take on the VIX is that it is yet another indicator that may be useful from time to time. The only problem is that one doesn't know when it is useful, therefore rendering it useless. In the mid 80's, the ARMS index was the latest craze on the technical indicator cocktail party circuit. In the late 90's, the VIX was cool. Last year or two, the newbie investing crowd seemed to "discover" the ARMS index again. What a hoot.
As with any of these "past history" technical indicators, finding the point where it makes the turn, i.e., the buy or sell signal, is impossible.
Of course, technical gurus love to point to the VIX or any other chart and show how easy it was to call the top or bottom...six months later!
With the exception of very few, authors of most investment advice books offer very little in the way of practical knowledge for the individual and especially the novice. Its hard to sell a book when the best advice is to buy and hold a mutual fund.
More on the VIX here:
http://www.cxoadvisory.com/blog/internal/blog7-13-07/
You wonder about the more recent dampening of the VIX. It had more to do with the narrowing of spreads between junk and all the better rated bond yields, due in large part to the eagerness of the producer countries to finance our current account deficit, as well as our Fed's desire to be most transparent with their actions. Do you remember the continued use of the word, "measured" in the Fed statements over the past few years?
i agree with the first post above...any "indicator" that begins to be followed by a significant % of investors will begin to lose its usefulness...until it falls out of favor.
i'm working on deciding whether it is possible for trading against negative sentiment to fall into or out of favor...after all, if enough people do it, you can no longer consider it negative sentiment.
2nd_ave
Actually, vix seems to stay in a well-defined range for roughly 5 year periods--from '91 to '96 it was similar to the recent low range. Also, much info and links to other vix-related sites at vixandmore.blogspot.com.
Hate to rudely bring this up, but in your "about me" segment, isn't the word "savy" spelled with 2 v's?
P.K.
Yes, I suppose that the utility of a measure is inverse to the number of folks using it!
Certainly the Greenspan put has likely contributed to the rather temperate movements in the VIX. As I re-read my Marty Zweig, he states that this is an indicator that he first introduced. (I did mention that I have an autographed copy of his book--he was vying for our endowment fund business, and I think that we awarded some portion to him).
I've corrected my profile. Savvy does indeed have two "v's" . I was parsimonious in my use of them. I should award a prize for this catch.
Leisa,
The chart makes me recall the paper on hedge fund correlations and the 1998 anomaly/fat tail that threw all the data off till it was dropped. "Neutral" quant. hedge funds are supposed to be behaving badly... correlated sttrategy-wise or performance wise with others??
Kasriel on how low volatility (and rates) beget leverage beget higher instability and likely volatility.
http://tinyurl.com/35kr87
Mark Hulbert argues that little or no predictive power resides in the VIX:
http://tinyurl.com/2enajz
2nd_ave
I appreciate the comments, thank you. I certainly understand how if too many follow "this" or "that" or picking on a particular indicator has merit in terms of being critically minded. But I firmly believe that if you have a basket of "x" indicators and they are (1) chosen well and (2) calibrated well, then cross confirmations are helpful.
The end point is being able to divine whether the trend is continuing, consolidating or reversing. It would seem to be easy, now, wouldn't it? Alas, it is like trying to divine water with a polecat.
hello
businessweek (8/20/07) has a nice chart matching the vix w/ the s&p500 over 10yrs saying the market dips 0.7% for every 1% jump in the vix.
p.s. i always enjoy your blog and hope you have fun with daisy.
thank you
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