Friday, May 1, 2009

ISM Manufacturing INDEX/MORE On The VIX Model

Judging from that last post, and the need to make a few additions to it after its original publication this morning, LB has called off any decisions about deploying the headknocker's capital this morning.  Besides, RB is in hibernation.  While the peace and quiet is  a pleasant change for LB, no constant brain chatter from the other side, LB sort of misses RB.

The ISM Manufacturing index for April showed continuing improvement rising from 38.1 to 40.1. LB places the most importance on the NEW ORDER component which rose from 41.2 in Martch to 47.2.  ISM - ISM Report    LB wanted to tell RB about that but did not want to wake it up. 

One of the lottery tickets is having a good morning.  First Industrial is up over 20% to $4.57 after reporting 1st quarter results last night.  Yahoo! Finance  Most of the very small amount of money risked in that firm is in its two cumulative preferred stocks.   RB did risk some in the common before FR eliminated the common stock dividend and is under water.  FR is for now still paying in full the cumulative preferred dividends.  As I have said many times, payment of a cash dividend to the common stockholders is the preferred stockholders security blanket. When that blanket is removed, then the condition is called by LB an enhanced risk of deferral.  

Some may ask why RB was just buying small amounts of stock during the 4th quarter of 2008 until the coup d'etat on 3/3/09.  RB was under orders by LB to follow the VIX Asset Model during an Unstable VIX Period, which limited the amount of money capable of being invested to primarily cash flow from cash dividends and interest payments.

All of the interest on the VIX model has come from overseas.  The FeedJit widget was just installed this last weekend which tells me what my readers may be interested in reading so that I can tailor my posts to their interest.  The Europeans and Asian visitors are very interested in this topic.   Anyone wanting to see the general geographic location of visitors can pull up the interactive map under options in the Feedjit space. 

Also when using the interactive charts at Marketwatch, I will frequently highlight a very narrow time frame.  To understand the VIX model's trigger warnings about the current bear market, highlight the VIX period chart at Marketwatch using the interactive feature (may need to join to use) between February and the end of December 2007.  The first indication of trouble to come happened in February 2007 with a burst out of the Phase 2 bull pattern.  If you go back and look at the news in February, that is when the subprime problems started to make headlines.  So this is an alert and not a trigger event under the current model.  The first trigger event to change asset allocation happened on 8/15/2007 with a spike in the VIX to over 30. The news about the mortgage mess was getting worse.  But I would not need to know anything about current events to know what to do based on the model.  The current events then just establish the external events causing the change reflected within the four corners of the model. The model then requires a forced reduction in stocks when the VIX, which is now in a whipsaw pattern characteristic of a change from bull to bear markets, moves down back into the stable range.  Most likely, it will not stay below 20 for long.  This creates an opportunity to lighten up at higher prices and this would then be done in October 2007 when the DJIA was over 14000.  A more conservative soul spooked by stocks may not wait for that opportunity.  This warning to change the allocation may be the last.  If another trigger event comes, then any doubt under the model needs to be resolved in favor of caution.  The next spike over 30 happens soon thereafter on November 12th, thus signaling the start of a bear market and an unstable VIX pattern that can only be resolved under the existing model by a return of the VIX below 20 for 3 months to form a stable pattern.  The reason why the model may work is stated in a prior post as follows:

It would be difficult to build a sustainable bull market move at elevated levels of volatility, which is where we have been for over a year now.  People have to have stability, feel safe and secure, and comfortable about the future, as a predicate to sustain a bull market over the long term.  The kind of volatility that we have been seeing particularly since Lehman's failure is the enemy of a bull market's formation.

The bull market may actually start in retrospect before the VIX model says to buy with gusto.  The 3 month lag period is in the model now to hopefully avoid a false signal, because the VIX can fall below 20 in the unstable pattern.  It just want stay there for very long.

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