Last quarter, every option strategist I talked to, or read his newsletter, complained about the lack of volatility .....and then the option traders quoted their favorite options newsletter and then they all sang the same song.
Well, next time, just make sure you really know what you wish for.
For the last four weeks, we have witnessed a massive expansion in volatility from near or at historical lows. The next two charts you see below are +/- 3 sigma (std dev) bands around the 20 day M ovAvg -- in effect, 3 std Bollinger Bands on top of each other with 2 minor modifications -- you can construct these yourself by changing the default inputs (+/- 2 sigmas) of one the Bollinger Bands to +/- 3 sigmas and the other one to +/-1 sigmas.
First index below is VXO -- the S&P-100 (OEX) Volatility Index and the second is VXN, its counterpart for NASDAQ-100 (NDX). I do not like the way the new VIX was mathematically constructed. Neither does Prof. Whaley, the creator of VXO. Sorry folks, the new VIX (for S&P-500) will not be discussed here.
Notice how many times the high of the day hit +3 sigma and pulled back -- what is critical (and different) here, is how far (bands) we pull back. Again I urge everyone not make the mistake of making conclusions based on absolute VXO/VXN levels -- rather -- look at the pattern and here we are aided by sigma bands which are really volatility bands. Look how cleanly they define the "limits of travel" each day.
In the second subgraph of each chart we have included the corresponding major market index (SPX & NIX).
Conclusion ....... VXO and VXN need to break +1 sigma -- until then this market is in trouble -- if we stay in +2 to +1 sigma, this market will continue to slowly bleed.
Next is our Timer Chart....some of you may have seen it on our website ... notice every FOMC Rate Decision is marked.
The McClellan Oscillators for Adv/Dec and UpVol/DnVol for both markets bounced back from a good short-term oversold today.
It was not ideal. I wanted to see a good flush which corresponds to -300 +/- level reading. Of course, that did not happened.
Intermediate term, the Seasonality is against us and long-term, it is anyone's guess given that level of margin debt is still high.
Conclusion....on this bounce, lighten up on your equities if you have not done already as you head to the Hamptons or Del Boca Vista, whichever happens to be your budget.
All the best;
Fari Hamzei
Tel: (310) 306-1200
Email: Fari@HamzeiAnalytics.com
YAHOO IM: hamzei_analytics
Group Leader of
Los Angeles eSignal, MetaStock & TradeStation Users Group: www.ActiveTraders.org
