Complacency

starspacer

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Is anyone out there somewhat unnerved by the low VIX number? At 11.45, the reading is lower than at any time I can remember, and suggests an extraordinary amount of complacency.

I've scanned sources on whether the VIX is correlated to the SPX and from my limited info, there seems to be an inverse relationship (low VIX, high probability of forthcoming correction). For example, in October 04, the VIX was 13 when the S & P was 1140. A fortnight later, the S & P had fallen to 1100, whilst the VIX had risen to 17.

Anyone have any thoughts on this, or is it just another meaningless correlation?
 
starspacer said:
Is anyone out there somewhat unnerved by the low VIX number? At 11.45, the reading is lower than at any time I can remember, and suggests an extraordinary amount of complacency.

I've scanned sources on whether the VIX is correlated to the SPX and from my limited info, there seems to be an inverse relationship (low VIX, high probability of forthcoming correction). For example, in October 04, the VIX was 13 when the S & P was 1140. A fortnight later, the S & P had fallen to 1100, whilst the VIX had risen to 17.

Anyone have any thoughts on this, or is it just another meaningless correlation?

Almost every volatility analyst . . . knows that when $VIX spikes up to a peak during a period of severely bearish action, then a "buy" signal is at hand. If you consider how this comes about, you will see that it has a contrarian basis. The spike peak in $VIX is caused by panicky "put" buyers paying up for protection and--once they have purchased that protection at top dollar--the market turns and rises in true contrarian fashion.

The fact that everyone agrees on the contrarian interpretation of a $VIX "buy" signal does not mean that they agree on any other $VIX interpretations. Specifically, what does a low $VIX mean? Those who only look back three years or so will tell you that a low $VIX precedes a declining market. That is not true when one considers a longer history (even assuming one knows what "low" is). Other, more astute $VIX analysts will tell you that when $VIX bottoms out and begins to rise, then the "sell" signal should be triggered. While this is a better interpretation than the previous one, it's still not correct.

What is true is that a bottom on the $VIX chart precedes a market explosion. If you think of this as a contrarian, you will see that it must be true. What does a low $VIX mean? It means that sellers of options are aggressive, that buyers of options are timid and therefore options are "cheap." In fact, these option traders don't expect the market to do much in the forthcoming days or weeks--that's why they let the air out of the options, making $VIX very low.

A contrarian knows what happens when a consensus is reached: the opposite! Well, what is the opposite of "...don't expect the market to do much?" It's a market explosion, of course. And the fact is that market explosions can occur in either direction. In the last few years, since we've been in a bear market, those explosions have come on the downside. But back in the 1990s, during the bull market, such explosions often came on the upside.

Therefore, to say that a low $VIX is bearish is wrong. Understanding that will separate you from most of the $VIX pretender-analysts out there.

Excerpted from the June 2003 issue of The Option Strategist.
 
Very interesting article dbphoenix, thanks.

The million dollar question of course, is which way does the market explode? Looking at the market, the internals look excellent (advance/declines doing nicely, Dow Transportation at all time highs, utilities doing well). The only 'fly in the ointment' seems to be that sentiment is way too bullish and that funds in the Rydex money market are lower than I would like. On the plus side, seasonal factors may continue the moves higher, together with New Year portfolio flows.

I exited my positions last night and immediately regretted it. May well put on a small long Dow position.

Good luck.
 
starspacer said:
Very interesting article dbphoenix, thanks.

The million dollar question of course, is which way does the market explode? Looking at the market, the internals look excellent (advance/declines doing nicely, Dow Transportation at all time highs, utilities doing well). The only 'fly in the ointment' seems to be that sentiment is way too bullish and that funds in the Rydex money market are lower than I would like. On the plus side, seasonal factors may continue the moves higher, together with New Year portfolio flows.

I exited my positions last night and immediately regretted it. May well put on a small long Dow position.

Good luck.

You may want occasionally to check on the thread I began in Indexes (or Indices, if you like :)).

As for "sentiment", that measures what people think, not what they do, and what they're doing is buying. Remember that the herd is always right, except at turning points. ;)
 
I would say the herd is blind rather than right, but you can't fight it though and it often gets things wrong... e.g. tulipmania, south sea, dot com etc etc
 
Yes, totally agree. I'll let the market (prices) decide when this bull market is over, I've got a feeling it still has legs.

Regards
 
Whether the "herd" gets it right or wrong is purely a function of time. Sooner or later they will be wrong.
In the mean time I have made money.
The herd is only regarded as wrong for three reasons:
they hang on too long and give it all back and more,
traders love thinking of themselves as being contrarian, that is, "special",
traders love thinking of others as being mindless animals - hence the word "herd".
Me, I respect the crowd.
My approach is different, I love the crowd - join them when they start moving and abandon them when they slow down.
Not so much contrarian as nimble.........
Richard
 
In the US markets, years ending in 5 (1975,1985,1995), have over the last 100 years tended to do very well.
If recent history is anything to go by we could see the dow at 13000+ by the end of 2005.

If you dont believe in cycles then the last 10 instances have all been random lucky up
years (like if you toss a coin sometimes it comes up heads 10 times in a row!).




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starspacer said:
I like that. How about a nimble contrarian, Mr Charts.

It's simpler and easier to make money by following the trend than by being a contrarian, nimble or otherwise.

But, chacun a son gout . . . :)
 
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