Monday, May 4, 2009

Vix Asset Allocation Model is Obvious

ADDED 5/16/2009: Some readers are coming to this post from Google.  This post assumes some familiarity with lengthy discussions which preceded it.  I would suggest starting with these posts: 
And then, if you are interested in this topic, my discussions are linked in this Gateway Post:

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In my prior post, I mention that the VIX Asset Allocation model was obvious.  This is not rocket science.  Being a long term investor, I knew about the past when I opened the chart for the first time in 2007 and just looked at it. I have no recollection of what prompted me to do that except I was looking for indicators to time the end of the bull market.  I am always looking for tools to assist me in my dynamic asset allocation approach.  So when I looked at the long term VIX chart, I was already thinking  in terms of asset allocation when the chart first revealed itself to me.  I do not trade options, have never bought an option, and had no use for the VIX chart except as an asset allocation tool.  

Being a serious individual investor, with over 40 years experience as such, always managing my own money,   I knew about the bear market at the start of the VIX chart in 1990, followed by the bull market in the 1990s, and the wild swings in 1997 and 1998 caused by external events still in my memory bank. I had already classified the behavior in 1999 as nutty.  I could see that the bull pattern in the mid-1990s was nothing like the VIX chart from 1999 to 2002. So, it was easy to classify the rise in the market averages in 1999 as an event not-confirmed by the movement in the VIX.  Under the model, the movement in the averages needs to be validated by the movement in the VIX.  A whipsaw pattern between 20 and 30 on the VIX is not consistent with a rise in the market, as seen in 1999, and the model is basically saying the move is phony.  The bull/bear pattern, as I said earlier, jumps off the page.  It is better to use the interactive marketwatch chart, rather than the one at Yahoo, highlighting any pertinent period of interest to get better detail. 

I have been discussing this issue at great length since I started this post last October.  I recently added a "gateway" post to provide a summary and links to my earlier discussions on the topic.

The cash raised by me in 2007 was stashed in cash type assets from treasury bills, CDs, saving accounts, and money market funds, plus short term bonds.  The modification of the trading rules in an Unstable Vix Pattern now permits more transfer of the proceeds from short term bond sales back into stocks but only on an opportunistic basis.  

In the movie Marathon Man, Lawrence Olivier asks Dustin Hoffman "Is it Safe", using enhanced interrogation techniques while making the inquiry.   For stocks, that question can never be answered with certainty.  The patterns  revealed by the VIX chart itself showed that movement below 20 can occur in a bear market, as part of the Whipsaw Pattern,  defined by the model to be an UnStable Vix Pattern, reflecting nothing more than a bear market rally or part of a Trigger event in a Transition Phase from bull market to bear.  Thus, is it safe can only be answered in the model by a stable pattern lasting 3 months at below 20 in the VIX, and then it says that it is merely safer when that happens based on prior experience, until the next Trigger event.  


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