Diary of a Financier

In Refutation of “VIX Lower Highs”

In Capital Markets on Wed 23 Nov 2011 at 12:14

I’ve been hearing a lot of the following argument, and I have to rebut it, because it’s either misguided or biased:

‘The VIX has failed a double top on October 4, which lower highs–despite new lows in stocks–have historically marked a market bottom according to analogues.’

The Street’s analysts & pundits who cite this as a bullish ingredient are either looking at the VIX in isolation of an SPX overlay, or they’re picking the wrong timeframe. These guys are choosing the failed VIX double top from pre-Thanksgiving 2008, after which the S&P continued to plunge and, yes, the VIX never returned to those highs.

In contrast, today’s fractals show that these guys need to rewind bit to May 2008. At that time, the VIX is not only appropriately aligned with the SPX analogue I’ve cited continually here, but also with the progression of technical indicators. The charts say it for me:

VIX & SPY (2008 v 2011)

VIX v SPY monthly

When you find what appears to be a tidy analogue in technical analysis, it’s so important to comb for other occurences where that same overlay analogue broke down and failed. You have to be honest with yourself if you’re going to succeed in capital markets. That’s one of the greatest lessons I’ve learned as a money manager–which separates the fiduciary/buy-side crowd from the broker/sell-side. You live by your performance, so you have to be willing win at all costs, to seek the truth, (by extension of which) to disprove your own hypotheses no matter how hard-wrought. You can’t approach analysis with a bias in your back pocket, because you’re not looking for bait with which to hook some cold-call; all you have to sell are your results. My business is about the ends, not the means, so I’m willing to discount all information–as opposed to settling for the sexy sales pitch.

On the record, I don’t expect VIX to turn in a 3.5x from here like it did in 2008. Following 2011’s tape, the low volume, the large cash positions, I don’t think traders and institutional big wigs are working with much of a portfolio. The shorts were the biggest game in town merely two months ago today, and their size was manifest in the chunky covering that propelled October’s rally. There just aren’t as many institutional positions traders out there with as much single-name equity exposure to hedge. Therefore, VIX doesn’t soar as much as 2008, nor as much as Implied Correlation (KCJ) might in 2011. Doesn’t mean VIX can’t double before it’s all said and done.


FYI- I own VXX. See the Trading Desk for my Trade Reconciliation.

  1. How do you find the time to do this on a daily basis? Outstanding! I only hope you put your creaticve and insightful talent to its best use.


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