Three undeniably sweet setups for Monday…
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Joined Nov 11, 2007
1,458 Blog Posts
A Really Low VIX Doesn’t Mean It Can’t Go Lower
Another “Hey the VIX is really low!” article is out in the WSJ. It is similar in message to the Trading Markets post, which I blogged about here: Is the VIX Too Low?
The WSJ article is worth a read, although it doesn’t present anything ground-breaking.
This evening I will dig deeper into the low VIX issue to see if we can draw some conclusions and even make some predictions about the future. You’ll note the Trading Markets and WSJ posts simply note that the VIX is low, that it has been low before, and that it could go lower, or not. I think we can dig deeper than that.
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Is the VIX Too Low?
Recently a reader asked me this question about the VIX trading beneath 15. I was actually preparing to study the issue for tonight’s blog post when I happened upon today’s Trading Markets post by Larry Connors.
I’ll let Connors’s post serve as a jumping off point. You can read it here: Is the VIX Too Low?
Over the next few days I’ll dig a little deeper than Connors has so that we can see what happens in the short and intermediate terms when VIX trades beneath a certain level.
In the meantime, if you are interested in reading more VIX related posts, I have housed all of them in the Volatility archive. There is some good stuff there, so give it a look.
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High Tight Flags for Thursday
Volatility has dropped to historically low levels, which should be flashing a caution signal. However, we may well see this low volume, low volatility environment continue into September. I clearly remember thinking during previous Augusts (when this type of environment develops) that it can’t last long. Almost invariably it lasted longer than I expected.
Anyway, the market is set to move in one direction or another. If it is up, these high tight flags may soar.
Revisited: S&P 500 Makes a New 900 Day High. What Happens the Next 100 Days?
I am republishing this post as it is still directly applicable to the current market scenario. $SPY is very near to making significant new highs…
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On Thursday, March 15th, the S&P 500 made a new 900 day high. With the S&P 500 re-visiting prices it hasn’t seen in almost 5 years, I thought it would be interesting to look at what happens after the index makes significant new highs.
The Rules:
Buy SPY at the close if
- SPY closes at a new X day high
Sell SPY at the close Y days later.
No commissions or slippage included. All SPY history used.
The Results:
Thoughts and Caveats:
Because the market was making significant new highs in October of 2007, the results show the impact of the bear market, starting around day 65. As the trades are being held for 100 days, any trade initiated in October 2007 was held through the beginning of 2008. Ouch.
On the brighter side, a new high of 50 days or greater has seen a surge during the last 25 days of the holding period. This surge appears to be the relatively normal result of buying during a bull market.
It should be noted that a new 900 day high generated the highest return.
Sample size grew as the X day new high number decreased.
The Buy-n-Hold return was calculated by chopping SPY performance into 100 day segments and then averaging those segments.
The bottom line is that save for a new Armageddon a la 2008, the market has tended to keep climbing after making a significant new high.
Comments »Looking For the Pause that Refreshes
As $SPY and $QQQ continue to climb the upper Bollinger Band, I am not looking for a strong pullback as much as some pausing and consolidation. That is not to say that there will not be a strong pullback. There will be. I believe it is too early for that. My point remains that this is not a market that is made for shorting.
Let’s look at an objective measure to add some perspective.
In the graph above, we want to observe the red line, Above_MA5, which is a representation of the number of stocks trading above their 5 day simple moving averages. We can see that it seems to correspond fairly well with minor market tops and swings. When the red line gets above 2500, it typically marks a minor top and the market pulls back. What we want to know is how much is the average pullback? Is there enough meat on the bone of one of these pullbacks to consider shorting?
The Rules:
Buy $SPY or $QQQ at the close if:
- The number of stocks above their 5 day simple moving averages is greater than 2500
We are going to sell at the close X days later.
No commissions or slippage is included. These tests unfortunately do not go back more than five years because there were not enough stocks to make the 2500 number, even using delisted stocks. In other words, there were still peaks and valleys in the red line, but it couldn’t make it to 2500 simply because there were not enough stocks in the market.
The Results:
The results show that on average, the market climbs slightly higher over the next few days, and then we see the slight pause that refreshes.
Even though $SPY and $QQQ are almost parabolic, this is not a place to short. Instead, we are looking for some consolidation, possibly a minor pullback, and then a resumption of the uptrend.
Comments »High Tight Flags for Tuesday
A couple of beauties here…
Aside: note the new wallpaper on the main iBC site. Those very butcher’s knives were hanging everywhere on the walls of the room where the iBC cognoscenti gathered for 2.5 inch aged ribeyes. A better time has never been had before!
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