So as Quantifiable Edges shows, we can rally in the face of mediocre pu/call readings. Sluggish volatility though? Could be a tougher nut, as this from Don Fishback suggests.
I looked at all instances of a 10% decline in the OEX going back to 1986, which is when the measuring period for VXO began. I measured a 10% decline as occurring if the market rallied at least 10% off of a low and then reversed down and declined at least 10%. For instance, the market bottomed at 589.15 on March 10, 2008. It then rallied more than 10%, peaking at 653.49 on May 6, 2008. The OEX has since declined 10% from that peak, closing at 586.38 on June 26, 2008. That 10% decline after a rally of at least 10% is what I am measuring.
I then looked at the level of VXO when each time we got of one of these 10% declines. What I found is pretty interesting, and not very comforting if you’re bullish. That’s because VXO is currently below 30%.
.......Bottom line is that when the market falls 10% off of a recent high, and VXO stays below 30%, what was bad gets worse. In every prior instance where VXO failed to climb to above 30%, the market continued lower. The MINIMUM additional downside is another 10%. In October 1987, you had additional weakness the rest of that week and the Crash the following Monday. The OEX fell an additional 27%. In August 1990, the market continued down for another two months, bottoming out 10% below where it was in August of that year. In October 2000, the market continued downward all the way into April the following year before bottoming out an additional 25% lower. The pattern was repeated a couple more times during that bear market.
Click thru to see the data.
Not all resulted in crashes, but did beget generally ugly markets.
Again, this week will not provide a good test of the VIX/VXO and friends. If we rally the slightest, they both likely go into the tank.
Whatever data says, we do likely need a volatility spike to get some sort of meaningful bottom. The pattern in 2008 is that the market declines and volatility goes nowhere for a while, then starts to move and gets everyone bullish too soon, and then finally crests in the mid 30's and teaches everyone that's exactly when to load up long.
So bold prediction here. We either never get close to 35 VIX again, i.e. the market turns before that. Or, we get to 35 VIX and the market gets very ugly first before turning.
7 comments:
Right now, the VIX is telling us either two things: (1) the bear market as a BEAR market is not sustainable (what I'll call the "Ersatz Bear" theory or (2) we have yet to really hit the bottom (which I will ca;; "The Bear's Comin' to GETCHA!" theory."
I see a lot of reason to embrace "Ersatz" -- Oil is in a bubble, the worst problems are localized to financials which have taken some pretty nasty tasting medicine, good companies are still earning money.
The "Getcha" theory in contrast says the tsunami is coming -- $200 oil, another huge round of write offs, credit markets griding to a halt. consumers stop spending, ECB raises rates...ugly ugly ugly.
Either one seems plausible. Those who buy the Getcha theory will only have their views confirmed by spiking vols. Those who believe in Ersatz will never be able to point to that moment where it is conclusively proven.
We shall see!!
Some people have the theory that volatility stays sluggish because there's no uncertainty; everyone knows we are going lower, lol.
Not sure I exactly subscribe to that one. I mean even if it's true, it suggests you'd get some vicious short squeezes in the middle.
Adam, I see that you are taking the Cramer route on bold predictions. LOL, be sure to claim victory whether or not we test a 35 VIX.
I say Thursday is gonna be critical with the ECB meeting and jobs report out the same morning...it may direct us in the trend we follow for the remainder of the summer...but as you say...it is a holiday week so may have to wait till next week for a VIX move.
yeah, hard to see anything significant happening this week, options wise.
Whatever the market does though, I did indeed call it, lol.
Seriously though, I read a couple of his commenters debating, and the one that defended him basically bought the argument that some of his bad picks would have been correct, had unforeseen events not happened. Um, isn't that the whole point of a prediction, to foresee that? "I predict the Mets win, unless they get outhit and outpitched".
lol, yea its like saying oh the Sox would have won if that Buckner fella was sick that day..or Cubs fans yellin about Bartman, lol
btw, did you see the game in LA over the weekend? no hits for the dodgers and they win anyways, ha wow
yes, saw it. I have jered weaver on my AL salary cap team. Not often not to get a W when you get a nohitter, but i've now done it twice in less than a year. I have clay buckholtz also, but he was in my minors system at the time (you lose a year of control over the player once you activate him, and you have about 3 weeks leeway). I also had justin verlander last year, so i've had 3 of the last 4 no-no's.
And no, nothing more fascinating than hearing about someone else's fantasy team.
haha, yea the only other thing more fascinating is when some clown on CNBC comes on and reassures me that we have snuck out of "Bear market territory" cuz we are only 19% below the Oct highs.
Thank goodness, cuz I was mistakenly of the opinion we have been in a bear market since Jan. lol
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