sweefraapp Posted April 20, 2003 Report Share Posted April 20, 2003 The following scatter plot shows the correlation between historical volatility and implied volatility from 22 days prior. With a correlation of +.57, it's moderately strong (on a scale of -1 to +1, a correlation of +1 would indicate a perfect correlation). This means that the VIX is a fairly good predictor of actual future volatility. Link to comment Share on other sites More sharing options...
sweefraapp Posted April 20, 2003 Report Share Posted April 20, 2003 So, the VIX reading of 24.59 from this past Thursday means that options traders are expecting volatility over the coming 22 days to be about the same as it has over the previous 22 days. This concept is the crux of the VIX Fear Premium, which is posted to the site. As you can see from that chart, options traders are now about as confident of future volatility as they were at this time last year, regardless of whether the VIX is at 25 or 20 or 15 or whatever. This should not be used for specific "buy" and "sell" decisions, rather it should be used to determine if the current environment is positive or negative for equities, based on the potential risk versus probable reward. In that sense, currently the risk of declining prices outweighs the potential reward of rising ones. This is confirmed by the VIX Transform, an indicator I presented for the first time last weekend. Again, this measures the distance of the 10-day VIX from the 200-day, transformed into a reading that is statistically valid. The "transform" part is extremely important, as it gives true meaning to the word "extreme". The Transform is now very close to maximum overbought, and this has indicated a negative environment for equities since 1986 on a very consistent basis. The total score for our short-term indicators reached an extremely low 27% at Thursday's close. This is one of the lowest readings in the past three years, meaning that there is a very large confluence of our short-term indicators in extreme overbought territory. In the past three years, the score has dipped below 30% only 7 times. The S&P 500 return 1, 3 and 5 days later has averaged (0.8%), (1.1%) and (1.5%) respectively, with only 1 of those occurrences resulting in an up market. That 1 occurrence was 8/14/00, after which the market made a steady climb of about 2.5% over the ensuing week before finally collapsing into September of that year. I want to quickly mention that the STEM model hit an all-time low at the close on Thursday. I touched on the low absolute level of the model a couple of times this past week, which showed the market's performance afterward, so I'm not going to harp on it again. But needless to say, a new record low in the model while price has done nothing should not be taken as a positive sign. Something interesting happened in the Rydex mutual fund complex on Thursday. Even though the NDX was up more than 2%, total assets in the leveraged Velocity fund, which is a long-side fund, dropped. Conversely, assets in the leveraged, short-oriented Venture fund rose. This type of activity happens less than 10% of the time when the NDX rises on the day, and it occurs less than 3% of the time when the NDX is up more than 2%. So when we see these wrong-way Rydex timers betting against a rising market, it should be a bullish sign, right? Not really. I've pointed this out before, but took another look this weekend. When the NDX rises on the day, and these timers bet against the rise, it is actually a better non-contrarian signal than contrarian. Meaning, the market dropped afterwards more often than it rose. The bias isn't that great, but I've had several e-mails suggesting it was a very positive omen, when in fact precedent does not bear that out. One positive from an intermediate-term perspective is the positioning in the large S&P 500 futures contract. For the first time in the history of this data (going back about 16 years), the Futures Balance Matrix, which compares the aggression of commercial traders versus small speculators on the long side, has been at 100% - the maximum bullish reading - for 5 straight weeks. Also, for the first time in over three years, commercial traders are more net long than the small specs. Just a couple of months ago, I thought it was possible we would NEVER see that again, so now that it's here, the potential message should be noted. I should temper that with a note about the e-mini once again. The total number of contracts being reported just by the commercials and small specs has approached 1 million, twice that seen just a couple of months ago, and five times what it was a year ago. As I've been saying recently, this contract has done a decent job at tipping off short-term turning points over the past six months or so, and while its long-term history is suspect, its recent record should be noted. In that vein, the commercials added heavily to their record short position during the latest reporting period, while the small specs increased their record net long position just as aggressively. This must be considered a negative for the short-term. Our short-term measures are suggesting in the strongest tone possible that we should expect weakness over the next 1-5 days. This does NOT mean that one should go out and randomly short the market - it DOES mean that when a valid setup presents itself, one should be more aggressive on the short side than the long side. The only possible exception to this should be if we trade above the 905 level on the S&P. If that happens and the market holds, I believe there may be enough trend-followers looking at that level to make an upside continuation a self-fulfilling prophesy. If so, I would then concentrate on the next level of resistance (930/940) to establish short positions, only at that time I would likely look longer-term. Our intermediate-term measures have not yet seen the confluence of extremes that the short-term ones have. We are still seeing positive indications from the large S&P 500 futures contract, as noted above, as well as the general level of NYSE specialist shorting and short interest in NYSE and Nasdaq issues. All of those are lending some support to the market here. On the negative side of the ledger, longer-term market breadth is overbought, Rydex mutual fund timers have been aggressive in pursuing this rally, put/call ratios are beginning to tick lower, the sentiment surveys are showing an overall complacent attitude (note the low relative level of the AIM model), and the low volatility is *extremely* troubling (see above). Oh, and lest we forget, we're STILL in a downtrend. When everything is taken together, it suggests that any move up over the 905 level is more likely to set up a high-odds, multi-week shorting opportunity than it is the launching pad for an extended ramp higher. - Jason Goepfert Disclosure: long OEX puts Link to comment Share on other sites More sharing options...
Slothrop Posted April 20, 2003 Report Share Posted April 20, 2003 Excellent work on this thread this weekend. Thousands of dollars worth of research is available here for almost nothing. Don't tell anyone. Link to comment Share on other sites More sharing options...
The End Posted April 20, 2003 Report Share Posted April 20, 2003 We are at 893 spx. I still say we see 850ish before 930ish. SG, I can no longer rule out what you have said. If you are correct, you where before all my guys. I'll give you Kudos then. Link to comment Share on other sites More sharing options...
alceringa Posted April 20, 2003 Report Share Posted April 20, 2003 Excellent work on this thread this weekend. Thousands of dollars worth of research is available here for almost nothing. You're sure right about the quality of the effort. Plus BB and Dr B. and others have done some great stuff on other threads. Don't tell anyone. An alternative would be to tell everyone. Most won't believe it and the rest will be eternally greatful. Link to comment Share on other sites More sharing options...
Gamma Posted April 21, 2003 Report Share Posted April 21, 2003 How do I post a HTML file from my hard drive directly without using "file attachments". IMO it is impossible. Link to comment Share on other sites More sharing options...
Guest BEARDRECH Posted April 21, 2003 Report Share Posted April 21, 2003 a short note on political fundementals influencing the market-- Disabuse yourselves about W being anxiety ridden about the future of the market performance relaative to his electability-- Karl Rove,political advisor genius has Bush in the catbird seat;from a position triumphant,Bush can now bag the democratic party with the label "economic sabatours":Rove having Bush asking for economic legislation in complete contradiction to Democrat aspirations He,Rove,made sure that HOOVERIZING,the labeling wooden stake awaiting to be plunged into Republican hearts, has,through rhetorical jiu jitsu,been turned back upon the Dems-- Bush is literally laughing his ass off and could give a shit which way the market goes--because the decline will be easily attributed to the Dems-- The Elephants have learned the donkey's game only too well and now the Dems will be crapping purple pellets in anticipation of their impotence--- All the "Its the economy stupid" will be converted into"Its a stupid donkey economy" as the Reps go laughingly to the polls--- Greenpan can drown in his morning bubble machine for all W cares-- His military victory,designed by some of the smartest people in the country,has given him a political vantage point that, in my estimation ,is almost invincible-- From a victorious military perspective he can now play the role of Republican Roosevelt--who by the way gave hope,not success(Raymond Moley,braintruster),economically speaking,for years-- :grin: :grin: bderech Link to comment Share on other sites More sharing options...
Guest Posted April 21, 2003 Report Share Posted April 21, 2003 So What? We are in a bull market. Things will get better. http://www.nytimes.com/2003/04/21/national/21ECON.html Link to comment Share on other sites More sharing options...
brian4 Posted April 21, 2003 Report Share Posted April 21, 2003 SWEE-that was good stuff-Thanks! Link to comment Share on other sites More sharing options...
brian4 Posted April 21, 2003 Report Share Posted April 21, 2003 Asia is getting mildy smucked-but Aussie bears all ords are getting WHACKED-and THEY track us and vice versa very well. Futures here are just a touch above fair value sooooo it wouldn't surprise me to see a gap down open tomorrow. Trade Safe! Link to comment Share on other sites More sharing options...
Dharmaeye Posted April 21, 2003 Report Share Posted April 21, 2003 Gold has been moving up last few hours. Stu Link to comment Share on other sites More sharing options...
Guest AssMaster Posted April 21, 2003 Report Share Posted April 21, 2003 We are at 893 spx. I still say we see 850ish before 930ish. SG,I can no longer rule out what you have said. If you are correct, you where before all my guys. I'll give you Kudos then. AFAIK, any awards being given out for being first to make this upside projection should go to gruff, who projected this potential outcome LOOOooong ago in Dr. B's TA forum in the Line Cloning thread. If he were louder and more of a personal horn-blower, perhaps he would have his own forum and a throng of devotees. Link to comment Share on other sites More sharing options...
Dharmaeye Posted April 21, 2003 Report Share Posted April 21, 2003 Dollar down a little. http://charts-d.quote.com:443/100298043283...m3=&FontSize=10 Link to comment Share on other sites More sharing options...
mjkst27 Posted April 21, 2003 Report Share Posted April 21, 2003 AFAIK, any awards being given out for being first to make this upside projection should go to gruff, who projected this potential outcome LOOOooong ago in Dr. B's TA forum in the Line Cloning thread. If he were louder and more of a personal horn-blower, perhaps he would have his own forum and a throng of devotees. Thankfully, he is not. Kudos and a tip o' the cap to Gruff! Link to comment Share on other sites More sharing options...
brian4 Posted April 21, 2003 Report Share Posted April 21, 2003 Guyz, Guyz, Guyz- End isn't wrong nor Gruff and SG right-YET! Lets see how it plays out-me I still think 905 will HOLD! Trade Safe! Link to comment Share on other sites More sharing options...
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