10 Year VIX versus SPX

Yesterday, we showed a one year chart of the VIX versus SPX.

It was apparent to someone watching both of these squiggly lines that a big scary spike in the VIX is a very good entry for traders on the long side fort he most part.

Here is the same chart comparison, only this time, we go back a full decade instead of 12 months. 
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VIX versus SPX, 10 Years

Vix_spx_long_term

chart via Fusion IQ, Bloomberg

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This is one of those technical analysis pieces which many people either ignore or do not understand . . .

My response to Felix will be posted at 10:00 am  . . .

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What's been said:

Discussions found on the web:
  1. Douglas Watts commented on Jun 24

    There are two things we can learn from this, besides the obvious one that Cramer has the memory of a goldfish and no one should ever listen to him.

    George Carlin, is that you ???

  2. Vermont Trader commented on Jun 24

    I worked for a fund out of college that was a pretty active trader. I laughed when I read the column because all we did was draw lines from low to low and buy at support.

    Our only goal as a trader was to get a average price below the day’s volume weighted average price. It worked really well and I still use some of the method today.

    When you size your postions at 5 days volume and it takes 10-20 days to enter or exit a postions you have to have a technical discipline.

    People like Salmon (who has never actually managed money) just don’t understand what it is like to buy and sell huge postions.

    He’s not worth the time.

  3. cinefoz commented on Jun 24

    The correlation is obvious, but magnitude is not a certainty. While history may once again repeat itself, you can also clearly see relative bottoms in the SPX while the VIX is not at an absolute top. Thus, you can say with certainty that the VIX goes up when the S&P goes down, but you can not say with certainty that the VIX must hit an absolute top every time the SPX falters significantly. However, I would concede that the VIX will peak when the bottom is ‘unexpected’ and swift. Today, it would take a pretty big catastrophe to provide the same movement in the VIX. If oil does not go down after Congress fixes the loopholes, then the VIX will probably build.

    The VIX is said to be a fear indicator. Fear requires surprise. This market may be a disappointment, but it is not a surprise at this time. Perhaps if you find a malaise indicator, the correlations there would be completely on point.

  4. UrbanDigs commented on Jun 24

    I also discussed this topic on VIX & S&P on a 6-Mth scale because the topic of conversation was the vix during this most recent credit crisis, in which the vix rose above 24 on six occasions.

    80% of the time, the week following saw a continued decline in the S&P. Clearly, traders will cover their shorts as the vix gets near the 27-30 level, and probably start to get long around there for a bounce as fear is high. Reversing it, a VIX in the 17-19 range is probably a good time to sell as complacency is high.

    For this latest downrun, its strange, as fear seems absent as we approached March lows. Not the case last time around. This is probably why the bounce may be a bit further away. I must admit I did cover my shorts last week and start to get long at end of next week, thinking it was a good entry point even though the VIX didnt reach the 28 level I was hoping it would reach.

    I guess fear level needs to increase a bit more before the next uprun, as this could be the downrun that brings us into a new trading range. Just look at the type of companies warning, and a re-adjustment of P/E’s is warranted (GE, FDX, UPS, C, LEH, MER, etc..)

  5. Mike in NOLA commented on Jun 24

    Thanks for the charts, BR. Seems to confirm the correlation.

    It slso shows my theory on a VIX in the teens being a sell signal is wrong, at least in a bull market. I suppose that makes sense since everyone is optimistic for a long time in a bull market. It does seem to have some correlation in the bear markets of the early 2000’s and recently, although why is a matter to ponder. Perhaps it is a sign that those left in the market are the CNBC believers — too clueless to be afraid.

  6. cinefoz commented on Jun 24

    I will repeat what I wrote yesterday … The stock market will shoot up like it has rockets tied to it if Congress closes the oil loopholes in July. Just about everything that is wrong with the economy will start to unwind and start fixing itself. It will be Goldilocks on crack for a few months. If you are a risk taker, this would be a good time to bottom feed. I started a little yesterday, but still have 75% cash available.

    I don’t think I hit ‘THE’ bottom and we may be several weeks away from the return trip up, but we are close and all you have to be is close and have a moderate amount of patience to make money on the bounce.

  7. jh commented on Jun 24

    cinefoz . . .

    what “loopholes” in oil are you referring to?

  8. cinefoz commented on Jun 24

    jh, No disrespect, but READ THE FUCKING NEWSPAPERS!

  9. jon commented on Jun 24

    But Salmon was criticizing people who forecast based on technical analysis – all you’ve done here is graphically show that the ‘leverage effect’ exists (which is less interesting, but more valid).

  10. UrbanDigs commented on Jun 24

    cinefoz – are you talking about steps directed at speculative trading???

    Via WSJ: Lawmakers eager to curb speculation in oil markets got support Monday from witnesses who told a House subcommittee that oil prices could fall sharply if Congress put strict limits on trading in energy futures by investment banks, pension funds and other financial investors.

  11. Steve Barry commented on Jun 24

    Two big picture points…first, VIX has to rise over 100% to get to past levels of fear. We are nowhere near the FINAL bottom, which could be DOW 4000 or lower (unles they pump it up with massive hyper-inflation).

    Second, the minute Obama gets elected, the guys behind the curtain will throw the switches and the market will fall apart to stick it to him…just like it did to WQ when he got in.

  12. cinefoz commented on Jun 24

    UrbanDigs,

    Absolutely. If Congress is wrong, then we are only at the beginning of the end of the world. I think Congress is right. The changes they will likely make will keep ample money in the market for hedgers and true speculators to make a market for oil. They will only kick out the parasites. It might even have a benefit of lowering the prices for other commodities that have piggy backed on the price of oil, but that is only a guess on my part. Natural Gas also appears to be excessively high.

  13. jh commented on Jun 24

    cienfoz,

    Of course there wasn’t any disrespect in your post.

    It’s interesting how when oil rises its evil speculators driving prices, but when stocks rise, its solid investors.

    It certainly couldn’t be fundamentals driving oil.

    Have a great day, cinefoz, and please cut back on the caffeine.

    love,

    jh

  14. cinefoz commented on Jun 24

    jh surmised:

    It certainly couldn’t be fundamentals driving oil.

    reply: Correct. It isn’t. It’s all pretty much parasitic speculators, as opposed to the true speculators that have been traditionally associated with futures contracts. A parasite, by definition, looks like it belongs, but doesn’t. Usually, the host feels much better when the parasites are removed, providing the parasite does not first kill the host. Parasites consume resources but provide no benefits. How does this differ from a long only oil index fund that ultimately raises the price of oil, and just feeds the parasite as the primary benefit?

  15. Philippe commented on Jun 24

    Once and if agreed that volatility or variance is no longer a normal distribution but a normalised behaviour it seems very cosmetic to try to build a theory of trading around this concept.
    The pattern of correlation between an index and the VIX may be read as « how much a so called free market is allowed to factor with new and old inputs »
    If not in agreement please see the hyperbolic pricing curve of commodities and meditate on the virtue of copper as a leading indicator

  16. jh commented on Jun 24

    cinefoz,

    a few points . . .

    1. Unless the speculators (whatever type there are) are actually taking stock in oil, they literally can’t affect the price. Since the volume of oil is so massive, it’s hard to believe that scenario

    2. In a futures contract, someone has to take the other side of the trade. So for all the specs who are on the right side, there are other who are taking big losses. In either case, they aren’t taking possession. So they literally can’t affect the spot price, which I understand has actually come in higher than the ending futures price often.

    As a trader, I like to be a bit less accusatory (labeling speculators) and more observant, trying to figure out what’s really going on.

    Although you disagree, I believe it’s the severe lack of sweet crude that’s driving prices higher. And until we recognize that problem, and stop looking for scapegoats, we can’t solve it.

    This is my last post on this debate. So please enjoy the last word.

  17. jh commented on Jun 24

    ooops.

    I meant to say “light, sweet” crude, not “sweet” crude. (light referring to viscosity, and sweet referring to sulfur content)

  18. cinefoz commented on Jun 24

    jh,

    Well, lets kill off the parasites. If the price doesn’t change then you win everyone else on Earth loses. I personally find the idea that oil can double in price over a short time without any obvious shortage of products made from oil a smoking gun against the parasites. It appears that 100% of demand can be met if suckers are willing to pay the price. That’s not a shortage, it’s a gouging from the middlemen, not the producers. It’s kind of a worldwide intelligence test, and, for once, Congress is on the right side of it.

  19. Retrogrouch commented on Jun 24

    But in the past we probably had far less of the action due to the plunge protection team. With their secret purchases to prop things up, how can we know with any certainty what the market is really doing?

    Is it possible to sort out the volumes of index purchases vs. actual stock purchases? I should think that would be a really interesting bit of info.

  20. daveNYC commented on Jun 24

    So even though the market has shown that people are quite willing (though not happy) to pay $130+ a bbl, somehow driving out ‘parasites’ from the market will drop prices?

  21. KnotRP commented on Jun 24

    If oil prices are marginally driven by speculation (which may be true), producers could kill the speculation with excess delivery of product….i.e. drown the speculators in oil at high prices, knowing oil is fungible such that speculators would eventually have to return it to the market or use it in place of new purchases. If prices are too high, producers have every incentive to take the other side of a speculative bet (since they can produce more product). Yet it’s not happening….even at $130. This would imply that producers are unwilling or unable to ramp up production to capture excessive (speculative driven) profit. Does it fit that anyone would be *unwilling* to take profits from speculators (who are apparently also destroying the oil-based economy that oil producers rely on for profits and stability)? I think that leaves “unable” standing as the sole reason.

    Speculators may simply be taking advantage of an inability to produce MORE oil. But isn’t this what pricing is supposed to do when supply is constrained?
    Getting rid of speculators of a certain type only changes who will profit from the supply ceiling….it won’t remove the supply ceiling.

    Get used to expensive oil, methinks.

  22. Colin commented on Jun 24

    The big point that you are missing here is that these tops are easy to pick in retrospect, but not quite as straightforward to pick at the time.

    I bet in late 2000 when the VIX jumped to 40, people using this ‘technique’ were lining up to buy stocks, only to see the VIX blow out 20% further and the S&P drop 20%.

    Makes for a pretty picture, and I actually agree that buying into fear is a good thing, but this graphic is pretty deceptive.

  23. michange commented on Jun 24

    Barry, doesn’t the thread here show that there is a forum business opportunity for TBP?

  24. bob commented on Jun 24

    Since it’s a coincident correlation, why not a simpler rule, ignore VIX and just buy SPX when it spikes down. Same result, no? But then I suppose you don’t get to draw all those neat colored lines.

  25. Michael commented on Jun 25

    Does anyone know how to generate a SPX vs VIX chart without a Bloomberg? Have played around with the charting options at several online sites and my brokerage accounts, but unable to create something with scales that allow this nice peaky comparison.

  26. John Doe commented on Jun 25

    Do you even know how the VIX is calculated? If you pull your zero IQ out of your rear-end, you’d relaize your thesis is true by definition. It’s basically like saying your should buy stocks everytime the market drops. duh.

  27. cptiger commented on Jun 26

    ENRON Loophole should be closed as soon as possible.

Read this next.

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