VIX 01 (Jun 09 - Oct 11)

[winston]

CHART OF THE DAY: A SURE BET

There is, arguably, no more important gauge of investor sentiment than the VIX. Market extremes are generally best seen by the extraordinary swings in the VIX. As we’ve recently described, the market has been on a drunken walk that takes it in one direction for a series of weeks and then suddenly reverses with the utmost conviction. This back and forth has been a hallmark trait of the range-bound market of the last few months.

With today’s invincible feeling in the equity markets the VIX has now fallen a remarkable 14 of the last 15 days. That’s a 93% win rate in a three week period. Not bad if you’ve been trading or hedging via the VIX. Unfortunately, this trend is more than unsustainable. This is the longest losing streak for the VIX since the March 2009 rally began and the few losing streaks that came even close were followed by sideways to down markets in the following 4-8 weeks.

The VIX has become a sure bet. As the old saying goes, if something seems too good to be true it probably is. The trend is your friend until it ends and this trend is beginning to look like a mighty bad bet to me. I’m not one to call tops, but as a manager of risk this indicator has me feeling a bit uneasy.

http://pragcap.com/chart-of-the-day-a-sure-bet

[winston]

THE VIX HAS PLUMMETED

Our chart of the week is for anyone looking to buy some "disaster insurance."

To the right, you'll see the past year's action in Wall Street's "fear gauge," the VIX. The VIX tracks the price market participants are willing to pay for portfolio insurance in the form of protective stock options. A VIX reading above 30 indicates folks are nervous... and willing to pay up for stock options. A VIX reading below 20 indicates folks see calm waters ahead.

In response to the January stock decline, investors pushed the VIX close to the "nervous" reading of 30. But since mid-February, the VIX has collapsed back down to its yearly low. Insurance is getting cheap again...

Source: Brian Hunt, Daily Wealth

[millionairemind]

Right at the support... looks like its going to bounce off it..

[winston]

One More Reason to Expect a Selloff By Jeff Clark

It's happening again...

Stocks are powering up to new 52-week highs, while the Volatility Index (VIX) – aka the "fear index" – drifts down to a new yearly low.

The inverse correlation between the VIX and the stock market shouldn't surprise anyone. We've written about it often enough in Growth Stock Wire. And it's well known on Wall Street sustained market rallies usually generate complacency among investors, which, in turn, creates a declining VIX.

What is less well known, however, is that after drifting down to a new low, the VIX has a nasty habit of suddenly reversing – especially if the new low is made during VIX option-expiration week. And the March VIX options expired yesterday.

Take a look at this six-month chart of the VIX...

The blue circles highlight the last five VIX option-expiration dates. In each case (except for February), the volatility index spiked sharply higher right after option expiration. Spikes in volatility coincide with sharp drops in the market. So in each case (except for February), the market dropped as well.

All of these moves were forecast by VIX option prices. Let me explain...

Following October expiration, the November VIX call options were much more expensive than the November puts. When November options expired, the December VIX call options were more expensive than the puts. Ditto for when the December and January options expired as well.

The exception was after the February VIX options expired. March puts and calls were evenly priced. This was the only time in the past six months the VIX didn't spike higher... and the only time stocks didn't drop lower immediately following VIX options expiration.

So in four of the past five months, VIX call options were much more expensive than the puts following option-expiration day. The market sold off in every case.

Last month, when the puts and calls were evenly priced, stocks didn't sell off.

This brings us to today...

VIX options for March expired yesterday. The VIX closed at just under 17. The VIX April 17 put options are trading for $0.30 while the April 17 calls are $3.30 – eleven times more expensive.

Clearly, the options market is pricing in the potential for a sharp increase in volatility. And since higher volatility usually coincides with a lower stock market, VIX options are forecasting a sharp reversal here.

Source: growthstockwire.com

[kennynah]

VIX options for March expired yesterday. The VIX closed at just under 17. The VIX April 17 put options are trading for $0.30 while the April 17 calls are $3.30 – eleven times more expensive.

this has been the case for several months now, where the Calls are much more expensive than the Puts... clearly many players are buying Calls, generating sufficient demand for the inflated premiums of these Calls...

[millionairemind]

VIX actually closed below its most recent lows set in early January last night.

http://stockcharts.com/charts/gallery.html?$VIX

Coupled with the lack of distribution days for the last 14 trading days since the March 1st follow thro', I would be hesitant to proclaim that it is going higher, or the market is going to crash.

Before the Black Monday in Oct 1987, there was a total of 22 distribution days out of the last 30 trading days before Black Monday.

Market always give out signals before it heads south, if it is allowed to run its course.

The black swan events, like a sudden war in the Middle East, will of course shock the market out of its complacency. But no one can predict that kind of seismic event before hand.

[winston]

The Volatility Paradox By STEVEN M. SEARS

THE GREAT RIDDLE IN THE OPTIONS MARKET, and one of the stock market's most vexing issues, is why implied volatility is so low when investor fears are so high.

It is hard to find anyone on Wall Street, or Main Street, who isn't worried that a second financial crisis may occur when central banks start accounting for all the money spent to rescue the financial system from collapse.

Yet, options volatility suggests sophisticated investors are discounting fears of the future that surround the financial markets. The Chicago Board Options Exchange's Market Volatility Index (VIX) is hovering around a two-year low.

The reason volatility is trending lower has more to do with complicated forces converging on the options market, rather than with oft-cited investor complacency. When stock prices "melt up," options-pricing models can get cloudy. Because recent stock action wasn't tumultuous, as recorded by realized volatility, pricing models reflexively lowered implied volatility -- the view of the future -- based on what happened in the past.
[CBOE icon]

The models can be overpowered by widespread options buying, but buying options to bet on rising volatility has been a losing strategy since VIX declined from an October 2008 high of about 90 to its recent level around 16.

Meanwhile, hedge funds, top options-market customers in recent years, have pulled back from the markets. Trading volatility is complicated, and sometimes capital intensive, which is the opposite of where many hedge fund managers want to be after the drama of the credit crisis. This further depresses volatility and stock-trading volumes.

IN A TELLING INSIGHT INTO THE secretive hedge-fund community, an options trader who counts many of them as clients said he increasingly hears fund managers recite this 2010 market mantra -- 80% of the money will be made in 20% of the time. These aggressive traders are watching the stock market like everyone else, waiting for a big dislocation to tip the odds in their favor.

Conversations with people active in all areas of the options market reveal a loose consensus that the stock market could quickly rise or fall by 10%. Some senior options traders say this scares institutional investors away from options because they are afraid of getting trapped -- something Wall Street banks are intimately familiar with, thanks to the credit crisis.

Many major investors rely on bank trading desks to facilitate options trades, but the banks' ability to assemble these trades is thought to be hampered by internal risk-management systems that are restraining trading. VaR, or value at risk, datasets still include second-half 2008 volatility levels, which predicted another Great Depression.

"You can't sell many 15 vol[atility] options without blowing through risk limits," the top options trader at a major bank said.

And so it remains that the return of capital, rather than the return on it, rests paramount in many minds, even when viewing options.

http://online.barrons.com/article/SB126 ... =djembwr_h

[winston]

The VIX is undercutting the lows from January, and that is an indication that the market is somewhat overbought in the near term. That showed up in the action last week with the day-to-day volatility, although it did not show up in the VIX itself.

This is that day-to-day volatility where the market chops back and forth in a big range, but there are not the surges in volatility overall. This could mean an interim pullback, but it is not suggesting a major top of any kind in place.


Source: MarketFN.com

[winston]

A Rare Trading Signal from the Volatility Index By Jeff Clark

Traders witnessed a rare event on Tuesday.

For only the fourth time in two years, the Volatility Index traded below its lower Bollinger Band and then closed back above it. (It sounds technical... but stick with me. It's important, as I'll show.)

On two of the other three occasions, the VIX exploded higher almost immediately... accompanied by strong declines in the stock market. The other occurrence led to a fast 10% pop in the VIX and a short-term market decline.

The VIX is a measure of stock market volatility and investor fear. On Tuesday, fear sank to its lowest level in two years.

Bollinger Bands – the blue lines – are used to measure the most likely confines of a chart's trading range. So, in this case, the Bollinger bands indicate the potential volatility of the Volatility Index.

It is rare for the VIX to trade outside of its Bollinger Bands. When it does, it often leads to a sharp and sudden reversal in the other direction. That was certainly the case in May and August 2008. The VIX rallied 75% and 300%, respectively. Each of those rallies started with the VIX at depressed levels below 20. And each of those VIX rallies coincided with sharp declines in the broad stock market.

The VIX traded below its lower Bollinger Band again in April 2009. The following bounce, however, was short lived, and the VIX fell even lower two weeks later. That instance, though, started with the VIX already trading around 35 – an arguably elevated level.

The situation today resembles the former cases more than the latter one. The Volatility Index closed Tuesday near 16 – the lowest reading in two years. Investors are complacent and have enjoyed 39 trading days without so much as a 1% decline.

It feels as though stocks are a one-way upside bet.

The action in the Volatility Index, however, is suggesting otherwise.

http://www.growthstockwire.com/

[millionairemind]

With the Bernanke PUT and US printing press in overdrive, alot of technical signals does not appear to work nowadays...