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Scott Downing
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Scott Downing is the Director of Research at BigTrends.com. Scott's columns are published in the Daily TrendWatch and Market Commentary. Scott joined BigTrends in 2008 adding new trading products to the existing BigTrends lineup. Prior to joining BigTrends, Scott was a Retirement Services... More
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  • Yesterday's VIX Rally MORE EXTREME Than 2008 Crash
     
    Yesterday's VIX Rally MORE EXTREME Than 2008 Crash

     

    We are all now terrible familiar with the explosion in the VIX from the fall of 2008 when it reached highs near 90 before slowly retreating in 2009.  So what would you say if I told you that yesterday's selling that prompted the rist in the VIX was the fastest and most extreme move since January 22nd of 2008?  Hard to believe, hugh?

    The way we measure this as technical analysts is through the use of Bollinger Bands around a daily chart of the VIX.  The Bollinger Bands simply plot the statistical calculation of standard deviation around the recent price action to let you know how "extreme" or statistically rare a price movement is.

    The standard setting for Bollinger Bands is 2 standard deviations over the last 20 bars of price action.  That typical Bollinger Band is depicted below in Black.  These bands should encompass 95% of the price action, so the other 5% is the statistically rare events.

    But how about 4 standard deviations?  How about 99.993% of all price action should fall within those levels.  I have plotted 4 standard deviation Bollinger Bands below in Blue.

    SPX Daily Chart
    5-7-2010_VIX_breaking_4_std_dev_bands

    So how many times have we seen a break above the upper 4 standard deviation Bollinger Band like we did yesterday?  Over the last 15 years going back to 1995, it has only happened 13 times.  There are about 250 trading days in any calendar year, so over the last 15 years there have been about 3,750 trading days, and only 13 times have we seen this happen, or 0.346% of the time.  Those times are listed below.

    5/6/2008
    1/22/2008
    7/26/2007
    2/27/2007 (on the close)
    5/15/2006
    7/7/2005
    8/4/2003
    1/30/2002
    4/4/2000
    10/28/1997 (on the close)
    10/27/1997
    7/16/1996
    7/19/1995

    Take-Aways
    There are a few items to take note of in that list.  First of all, we haven't seen this wild of a statistical even during the major market events of Fall 2008 when Lehman Brothers filed for Bankruptcy or when Congress failed to pass TARP the first time.  It also didn't happen after 9/11/2001 when the markets re-opened after the terrorist attacks, and it didn't happen in 1998 when Long Term Capital Management collapsed.  In short, this rarely happens, but it did yesterday, and that is why so many computer systems mal-functioned in that 30 minute span.

    Also, 9 of the 13 times have been in May-October, the traditionally weaker 6 months of the year when some market forecasters tell you to "Sell in May and Go Away".  There is also a strong correlation of this happening during the "Dog Days of Summer", as 5 of the 13 have happened in July and August.

    Plus, these surges on the VIX appear to only take place during times of shear panic, because we haven't seen the VIX close below the lower 4 standard deviation Bollinger Band at all in the last 15 years!

    Finally, there have only been two times where we have seen a close outside of those bands in the last 15 years.  This equates to only 0.053% of the time.  Or said another way, 99.946% of the time over the last 15 years, we have traded within the 4 deviation bands.  The other 11 times, we just saw intra-day price action outside of them.  Yesterday was not a close above them either.

    Bottom Line
    So that data is interesting, but how can it help you to make money?  The last three times that we have seen a breach of the upper band, the market has been flat or higher two weeks later.  This suggests that the majority of the damage has been done, at least in the very short term.  Although the market could go lower a bit from here, it is very unlikely that we would see a quick meltdown of 4% like yesterday.

    Be cautious with your trading over the next few days, and take profits when you have them on your put trades, because this data tells us that many of the bear profits have already been made in this market decline.

    Scott Downing
    Director of Research


    Disclosure: No positions
    Tags: SPY, CBOE, VXX, Volatility
    May 07 1:33 PM | Link | Comment!
  • The Asset Class You Don't Want to Miss

    Scott Downing
    Director of Research
    , BigTrends.com

    The incessant chatter from the media lately has been about Gold breaking 1,000 and the Dow breaking 10,000.  You can't pick up a paper, go to a website, or watch a financial TV show without hearing about how bullish Gold and Stocks are right now.  And to be fair, we are also bullish on those assets, and have been for a while now.  But there is another sector that is even stronger right now that you don't want to miss.

    If you are a subscriber to our FREE Daily TrendWatch articles, then you likely have stumbled across our weekly analysis of Oil.  Many people have been taking that for granted lately, and it might be coming back to bite them right about now.  The reason being is that a specific Oil niche has been outperforming both Stocks and Gold lately, and the margins are not even close!

    Take a look at this chart comparing the GLD (NYSEARCA:GLD), USO (NYSEARCA:USO), SPY (NYSEARCA:SPY) and OIH (NYSEARCA:OIH) since the March 9 bottom in stocks earlier this year.  While stocks are up over 45% since those March lows, the Oil service stocks are up over 70% during that time.  This compared to the actual commodity of Oil shows the USO with only a 35% return during that period.  While people have been watching the commodity, the oil service names have really been moving.
    10-15-2009_GLD_OIH_SPY_March_9

    If you want to by hyper focused on the near term, then we can look at the last 29 days going back to September 3rd.  The OIH leads the pack up 20.6% while the other three assets are hovering around the 7% to 10% return area.  This is a huge amount of relative strength in such a short period of time, and with the Macro-economic conditions that exist in the market right now, we are likely to see this trend continue through the end of the year, if not further.
    10-15-2009_GLD_OIH_SPY_30_Day

    When Price Headley and Bob Lang were last in Chicago in September, they talked about GOLD, Silver and Oil in this Video here.  They mentioned back then that we see Oil going to $90.  We just crossed $75 today, so there is still tremendous upside.  Don't miss out on this next Big Trend!

    Disclosure:  Currently long National Oilwell Varco (NYSE:NOV) and Hess Corp (NYSE:HES).

    Oct 15 3:31 PM | Link | Comment!
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