Saturday, May 2, 2009

VIX Chart from 2007: Alerts and Triggers Major Disruption of Cyclical Stable Bull VIX Pattern

To better illustrate a point, LB has included a chart for the first, and possibly the last time in this blog to highlight a few critical issues in the VIX Asset Allocation Model.

Vix Asset Allocation Model Explained Simply

For several months prior to February 2007, the VIX pattern was in a Phase 2 stable bull pattern fluctuating mostly in the range of 10 to 15 on the VIX. In February 2007, there was a major spike in the VIX, totally disrupting the Phase 2 pattern. This coincided with the first major news about the subprime mortgage problems in the U.S. A reader could do a google search using some search words like "subprime February 2007" and find some of the news. This is just an example from 2/21/

The decisive and strong break out of the Phase 2 pattern is called an "Alert" under the model. LB is now required to learn as much as it aging brain can absorb about the reason causing the disruption in the stable Phase 2 pattern. Due to its strength, this break of the calm that previously existed would be classified immediately as an important Alert.

The Alert does not trigger a shift out of stocks. It would require an analysis of the problem and how the problem would cause changes in asset allocation and security selection.

After the Alert, the VIX resumes what is classified as a stable Phase 2 bull pattern, but at a slightly higher range than the one existing prior to the Alert.  

Then something new disrupts the stable bull Phase 2 VIX pattern. The events happening now in June and July appear to have permanently altered the pattern into a Phase 1 pattern of movement between 15 to 20, and a durable move from a Phase 2 into Phase one is another ALERT. I know something important is happening in the real world, just looking at the chart.  

Then, the Trigger happens. This is a major disruption in the Cyclical Bull Pattern that had been in place since October 2003. The model, as now configured, then requires, without any equivocation, a lightening up on the stock position, with the amount and timing up to each individual based on their own unique risk tolerance and needs. Some investors might just prefer to ride it out. The model says nothing about how bad the upcoming bear market will be or the severity of it, and that factor along would effect asset allocation decisions. The model is simply saying that a bear  market is coming

The severity of the spike in August, as well as the length of its duration at a heightened level, qualifies as the First Trigger. The VIX now starts a Whipsaw Pattern, first staying at an elevated and uncomfortable level in the mid 20 range.  

Then, the opportunity to lighten up arrives, with a movement in October to below 20. If I knew nothing about the market averages other than what is being revealed in this VIX chart, I would say the market recovered from a sell-off and was rising in early October 2007.  

This Whipsaw Pattern movement up and down is a characteristic of a Transition Phase from a Bull to a Bear market and to part of a pattern in a Bear Market. A decisive break above 40 means the nastiness is going to get a lot worse. Otherwise, the Whipsaw Pattern may fall down below 20 for a short period and then back up to an elevated level inconsistent with a stable bull pattern. This is called an Unstable Vix Pattern, which invokes a new trading book of rules for a bear market.


Another break from below 20 to over 30 happens soon in November, and the duration of the event moving between 25 to 30 is also significant.  This is a Confirmation Event under the model as presently configured, subject to change, that confirms the first warning signal in August of the emergence of a bear market-Duration Unknown. The model does not require a close above 30 but focuses on the duration and the elevation of the elevated VIX pattern.

There was a compromise between RB and LB, #8,998,887,123, that LB will take down that stinking picture from the profile on this blog which reeks of its essence and put the old geezer photo back up which at least has a tiny hint of RB in it. As a result of this latest compromise, RB has agree to end its strike and come back to work on Monday.

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