Diary of a Financier

We’ve Seen This Complacency Before

In Capital Markets on Fri 7 Dec 2012 at 07:55

I took a good look at the Volatility Index (VIX) yesterday when I noticed Treasury prices uncharacteristically rallying alongside equities. The VIX closed +0.73% @ 16.58–another weird accompanyment to a stock rally, although VIX feels like it’s been irrelevant for months now. For that very reason (i.e. complacency), it’s worth studying vol for a moment.

From late summer into the fall, VIX has been bumping along post-crisis lows around 14. Then, SPX’s meaningful October/November correction was barely able to budge vol >19. This trading range says complacency, even though SPX and the media give you the impression that fear and desperation are the flavors of the day.

As I’ve said so many times before, VIX is a coincident indicator. It doesn’t lead or forcast anything. When everyone’s on one side of the boat, that’s when you capsize. When traders aren’t hedged and there’s unanimity in a marketplace, you have to evaluate the other side of the trade. This feels familiar… this looks familiar… that’s because we’ve been here before. I see a VIX analogue to November 2011, with self similarity in the two time periods’ chart patterns and bull divergence:

VIX 2012 v 2011 analogue (daily)- identical pattern formations with bull divergence.

VIX 2012 v 2011 analogue (daily)- identical pattern formations with bull divergence.

As I’ve also repeated over the past months, the fiscal cliff is a contrived crisis. Perhaps it’s serving to distract us from the real, cyclical & secular problems we’re battling, and perhaps we’re about to get a wakeup call… add it to my wall of worry.

–Romeo

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  1. […] is due in 1q13. That includes historical precedents governing precious metals (2009), tech (2007), volatility (2011), the US Dollar (1996), and politicians (2008 & 2011). As noted parenthetically, not all […]

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