Volatility and Sentiment: Today Doesn't Matter

Some semi-random thoughts inspired by today’s market action:

• The VIX:VXV ratio spiked up to 1.12 at 1:12 p.m. EDT (I’m not superstitious, but that’s an interesting bullish signal)
   
• The underappreciated VXN (volatility index for the NDX or NASDAQ-100) spiked over 34 on Friday and made it as high as 33.76 earlier today. That’s not enough to satisfy the “VIX must spike over 30!” purists, but it is an interesting data point, particularly because the VXN and NDX excludes financials
   
• My VIX algebra says that two medium to large VIX spikes on Friday and today do not equal one large capitulation-friendly VIX spike
   
• The CBOE equity put to call ratio – an excellent market timing indicator – is looking bullish

When all is said and done, I don’t think we can have a serious market rally until the tone of the news flow changes, regardless of market technicals and sentiment data. There must be several bullish macroeconomic and/or fundamental data points which collectively give the bulls a reason not to be so skittish. At a minimum, the markets need to navigate the PPI, CPI, industrial production and capacity utilization data due out tomorrow and Wednesday, then weather the flood of earnings reports (with strong representation from some key financial institutions) on Thursday. Even then, there is the Citigroup (C) earnings story on Friday morning.

Whatever happens to the rest of today’s session, the balance of the week will tell the story.

Comments

[dougnhi:]

Couldn't agree more. The head fake of VIX spike above 30 was just that...a head fake. The failure and subsequent rundown at the end of the session is just setting up folks for more "catch the falling knife" games. The slope of the VIX tells the story....a slow bleed. It sure looks like the VIX will spike to at least 35 or higher (assuming it does so soon). If it continues this low ramp, it could go much higher. The sooner we get the panic sell-off, the sooner we'll be ready to rally. I think it will be obvious when you see both the market and commodities selling off hard at the same time. Right now, commodities sell off just a tad, and the press bites. When you see hard commodities sell off without intraday relief, that's when you'll know a stock rally is in the cards. Until then, don't buy the fake moves! We're probably going to 10,500 on the DOW before the rally starts (assuming we get a selloff soon...otherwise it will be lower!).

2008 Jul 15 04:22 PM

[ICouldBeWrong:]

I was buying heavily today ... covering my shorts. I expect a bounce back up to 1230-1300 (when I will start shorting again), before the S&P500 falls to well under 1200. (Then another bigger bounce back to the same levels 1230-1300).

I also find the vixandmore website interesting and only found it by accident myself a few days ago. Another thing I found interesting (alarming really) is that the methodology used to compute the VIX itself has changed, so it's no longer the VIX its something different now. The old (REAL!!!) vix has now been renamed to VXO on stockcharts.com.

Good article about that here:
zealllc.com/2008/vxosp...

2008 Jul 16 12:08 AM

[bluecat:]

As Carter Worth said today on cnbc, people are buying this market trying to catch the bottom. As long as this continues, there will be no bottom!

2008 Jul 16 12:49 AM

[ICouldBeWrong:]

Looks like crude has suffered a failed breakout, short term trend in crude is now downwards. Unsure whether 50-60dma will provide support. But I have doubts it, suspect 150 is going to be tough to crack, could go down to 79-105 now. Decided to close my short term commodities position as well. Even got out of a little of my precious Yen, but will buy more Yen later, and short S&P again, probably next week.

Small loss in commodities (due solely to crude). Breaking even on Yen. Big profits shorting S&P500. Time for a short break.

2008 Jul 16 12:56 PM

[Dan Walker:]

ICouldBeWrong, thanks for the ticker for the old VIX! And it went [I]well[I] over 30.

2008 Jul 17 04:54 AM