Wednesday, May 20, 2009

VIX and S & P Compared 1990 to 1997

The top chart is the S & P 500 from about July 1990 to April 1997.

The bottom chart is the VIX for about the same period. 

Under the VIX Asset Allocation Model, as currently configured, I can see that this market is in a bear market at the start of the VIX chart.  The pattern is characteristic of the Phase 1 Unstable VIX Pattern.  The S & P chart starts at 361 in July 1990. By the end of 1990, it is at 321.  During that period, the VIX starts at around 21, shoots up to over 33 in August, falls down to around 21 in November,  and then back to 36.2 on 1/14/91.  ^VIX: Historical Prices for CBOE VOLATILITY INDEX

That day marked the highest reading in the VIX until 1997. The VIX starts to drift down in January so by the end of the month the VIX closes at 20.91.  It then spends February moving in the low 20s with some tentative moves below 20.  On March 12th, it closes at 18.82, on the 13th at 16.09, and at 14.94 on the 14th. ^VIX: Historical Prices for CBOE VOLATILITY INDEX 

On March 14th, 1991, the S & P 500 was at 373.5.

The VIX is in a STABLE VIX PATTERN of below 20 and stays in that pattern  until the Trigger Event in 1997. ^VIX: Historical Prices for CBOE VOLATILITY INDEX

On April 30, 1997, the S & P closed at 801.34 ^GSPC: Historical Prices for S&P 500 INDEX 

I think that is  conclusive of the historical value of my VIX Asset Allocation Model.

Many people claim that there is no predictive value to the VIX. VIX Up, Market Down? Others assert that "there is nothing monstrously significant about any absolute number in the VIX" Minyanville

I would remind the reader to look at the charts from 2004 to 2007 and the one from 2007. Then look at the formation of the Phase 2 of the Unstable VIX Pattern in September 2008, and the long chart of the current Unstable VIX Pattern.

What are these people looking at, it is just plain as day to me. 

Some also say that a one month forward index of volatility can not be an indicator of longer term cyclical moves in the market. I would just respond with several comments. It has proven so far that it can be used as an indicator for longer term stock asset allocations. But I would add a few other comments. It is continuous. So high levels of volatility over 20 is a continuous elevated movement of volatility over time, as shown by the movement in the VIX since August 2007 to now. Second, the initial spike out of the Stable VIX Pattern to around 30, the Trigger Event, is invariably connected to some unsettling event in the market. It is a rational fear causing the volatility. Look at the chart from 2007. The market was continually being jolted, with 3 separate Trigger Events between August 2007 through January 2008. The duration, intensity, and closeness in time indicate something extremely unsettling is occurring in the real world. We know for certain what those events were then and now.   Lastly, I made the point in a prior post that a large segment of investors make pricing decisions based on the here and now. Heightened Volatility=More Risk=Potential for Lower Prices to Compensate for the Increased Risks So an enhanced level of volatility now, or predicted over the next 30 days, will cause many to price stocks lower to compensate for the perceived increase in risk for that asset class.