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Monday, November 03, 2008

 

volatility real vs implied


bill luby of vix and more fame passes on one of the more illuminating market observations of recent vintage.

[I]t just might be worth noting that in the 19 year history of the VIX, four of the eight largest negative divergences between the VIX and the SPX 30 day historical volatility have occurred in the past two weeks (the other four were from August 2002). Looking back at the history of these negative divergences, they have regularly occurred just before substantially below average market performance. The 14 instances in which the VIX was at least 10 points below the 30 day historical volatility of the SPX, for instance, resulted in an average loss of 8.6% in the next 20 days. The 76 instances in which the VIX was at least 5 points below the 30 day HV of the SPX produced an average return of -1.2% in the next 20 days.

If you look at positive divergences, the story is the exact opposite. The 29 instances in which the VIX was at least 15 points higher than the 30 day HV of the SPX led to a 6.6% return over the course of the next 20 days. For 67 instances in which the VIX was 12.5 points higher than the SPX’s 30 day HV, the 20 day return was 4.5%.


adam warner comments today, adding mr. luby's work to some of his own weekend observations.

It all makes sense if you think about it. We've noted this about a jillion times, but as frothy as the VIX looked, it consistently lagged realized volatility throughout the market plowage. In a way, it was a sign of complacency. Or at least a sign of Fear not being........Fearful enough.

And we're back there again, as the VIX sits over 10 points below 30 day HV. Not to mention a solid 15% or so below it's 10 Day SMA. Dare I say it, but have we become a little too calm, too fast?


that's the $64,000 question, isn't it? i would intuit that some manner of retracement/retest of last week's low is probable; when that happens, of course, is unknowable and may take weeks to develop. but mr. luby is implicitly placing a probable timeframe on the discussion of twenty days -- a november retest.

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gm - here's a fantastic quickie if you've not seen it:

http://www.nytimes.com/2008/11/02/magazine/02wwln-Q4-t.html

[excerpt] Reagan’s economists worshiped the market, but Bush didn’t worship the market. Bush simply turned over regulatory authority to his friends. It enabled all the shady operators and card sharks in the system to come to dominate how we finance.

maybe a sort of epitaph for election 2008.

showtime, eh? (or, let me here you fat lady. quickly. and please?)

 
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from perrone: guys, it's time to short, it's time to grab all the index shares you can and short. don't miss it. it's the last major blip you'll get a shot at for god knows how long. after this, sit out till S&P 650.

oh, it's a landslide coming, by the way. I've got a feeling even Georgia will swing. sweet, a black man wins where the heart of the confederacy beat.

 
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anonymous - can you post the perrone link in a comment?

thanks!

 
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sorry perrone - i just realized i read your comment wrong.

thanks.

 
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