● Something
interesting happened at close of Friday to VIX. As you can see from left
chart, the green line turned positive (which does not happen often). The
green line is the Point&Figure Trend Indicator found in Metastock Technical
Analysis software. I will not go into explanation of this indicator, but
it is a good indicator to use for instruments that exhibit strong moves in
direction and scope, such as VIX.
● I
did some further analysis and found that since 2000, P&F Trend Indicator
turned positive a total of 18 times not including the most recent turn, when
VIX was less than 25.
● The
table shows the max % gain and max % loss of VIX after the P&F Trend
Indicator turns positive. I chose 8 days as a forward looking period
because there are 8 trading days (7 + overnight) to go before May VIX settlement. As you
can see, the max % gain of VIX within 8 forward trading days averaged 28.6% and
the max % loss averaged -6.7%. That would mean that the expected range of
VIX in the next 8 trading days is 17.9 - 24.6. VIX closed on Friday at
19.16. Admittedly, it is hard to determine "expected values"
with such a small sample of data.
● I
did notice two instances where right after P&F Trend Indicator turned
positive, VIX immediately plunged (highlighted in yellow in the table).
First was on 3/22/2004 and second on 3/13/2007. (see third chart, dates in blue circles) I do not believe the
market environment on 3/13/2007 is similar to the current market
environment. In particular, VIX had already risen 80% from recent low
then of 10.02. March 22, 2004, however, could represent a similar market
environment to that of the current one. There were concerns then about
steep valuations and the market having come up too high too fast. Here
are 2 links after a quick google search that can provide some market color on
March 22, 2004. 1)http://www.hussmanfunds.com/wmc/wmc040322.htm and
2)http://finance.groups.yahoo.com/group/investorguide/message/223. One
thing is common with both dates however. The P&F Trend Indicator
reversed to negative just 2-3 trading days after it turned positive--meaning
that if the latest signal results in a whipsaw trade, one would likely not have
to hold the position for the entire 8 days and incur maximum losses.
● Unfortunately,
VIX is not an easily tradeable instrument. One could buy May VIX
Futures. It closed on Friday at 20, which is 4.38% premium over
VIX. While the average premium with 8 days to go before expiration has
been 1.96%, if we put in a filter with VIX <25, the average premium of VIX
futures over VIX has been 4.73%. One could buy the VIX May 19 calls at
1.95...Or perhaps a superior risk adjusted strategy may be to buy the VIX
futures spread (buy May, sell June or July) or buy VXX and sell VXZ as a pairs
trade. Should VIX jump, the front month VIX futures should rise
considerably more than the back month VIX futures. Of course, if we get
negative market impacting news from Europe over the weekend, the opportunity to
make a trade on this analysis may have slipped away...
● Finally,
VIX has been moving incredibly close to my FVE model for the past several
weeks. Looking forward to Monday, my Fair Value Estimates for VIX are
indicating ~19.5 (SPY rising 2%), ~19.3 (SPY rising 1%), 19.5 (SPY unchanged),
19.7 (SPY falling to 136), and 20.1 (SPY falling to 135). On Friday, VIX
closed at 19.16 while FVE closed at 18.9.
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