Monday, June 22, 2009

Still in an Unstable Vix Pattern: A Dangerous Volatility Pattern Inconsistent with a Profitable Buy and Hold Strategy

1. VIX Up 11.36% to 31.17:  My Vix Asset Allocation model is still flashing red.  The significant movement today back over 30 is consistent with Phase 1 of the unstable VIX bear market pattern.  

We do not have VIX data for the 1930s movement in the market.  Louis Yamada has pointed out that we are tracking the whipsaw pattern from the late 1930s now.  Barrons
When I look at that pattern of movement in the DJIA from 1937 to 1942, I really do not need VIX data to know what it would be showing.  I am confident that the VIX would be showing in the 1937 to 1942 period a whipsaw pattern characteristic of what I have labelled an Unstable VIX Pattern. Vix Asset Allocation Model Explained Simply With as Few Words as Possible The Unstable VIX Pattern is a bear market pattern, a market that has to be traded frequently to make money which would be virtually impossible to do on a consistent basis even for the nimble, lucky and well informed.  It remains to be seen whether we will repeat the pattern from 1937 to 1942.  It is best to remain cautious until I have more clarity.

The VIX model did signal the onset of the current bear market.     Stocks & Politics: VIX Chart from 2007: Alerts and Triggers Major Disruption of Cyclical Stable Bull VIX Pattern  It was also successfully backtested for timing entry into a cyclical bull phase and an acceptable exit before major damage caused by a cyclical bear phase.  So it has street creed with me for now at least.   Some of the posts on the back testing are described below: 

(these posts show charts of a stable VIX bull patterns in the 1990s and from 2004 to August 2007:Stocks & Politics: VIX and S & P Compared 1990 to 1997

(added a highlighted green a heading near the bottom of this post which discusses the period before the 1987 crash: Trading and Asset Allocation in Stable and Unstable VIX Pattern)

(this post shows how the use of the model would have enhanced returns in the 2003 to 2007 period switching to 60% stocks/40% bonds at the start of a Stable Vix Pattern, and then switching to 60% bonds/40% stocks shortly after the First Trigger Event in the model, a simple allocation strategy using the VIX model to time the switch-JUST AS A TEST OF THE MODEL : Stocks & Politics: More on Failures of Standard Asset Allocation Models and Target Funds/Use of Volatility in an Asset Class to Make Adjustments to an Asset Allocation)

(the period in 1997 to 2003 is discussed in several posts including this one:BEEPRA/ VIX/BOUGHT LXPPRD/ More on VIX AND ASSET ALLOCATION )

 Until volatility returns to a Stable Vix Pattern, I am in my trading mode for a long term secular bear market which requires also that I sit on a lot of cash and bonds, just waiting for volatility to simmer down. (item #6: Long Term Stock Risks and Situational Risk/Managing Lost Opportunity Risk in a Long Term Secular Bull and Bear Markets/)Most sideline cash can not be invested under my model until the VIX returns to readings below 20 and stays below 20 until I am reasonably confident that a new investable bull market has risen from the ashes of this horrific bear market.Trading and Asset Allocation in Stable and Unstable VIX Pattern Multiple Confirmations of VIX Model-Canary in a Coal Mine
I am currently allowed to invest cash received from dividends and interest into buying common stock.  Fortunately, I have a large number of cash generating securities throwing off a constant stream of cash, many of which are discussed in this blog if I bought them after I started it last October. I can also use the proceeds from one common stock sale to buy another. 

I have violated the restraints on stock investments on a few occasions. I violated the model back in early March by investing about 30 grand in stocks which I will do again only if the VIX first establishes stability in the 20 to 30 range.  This is not permissible under the model but I allow it as a relief valve to ease tension here at HQ between RB and LB.  (Items 7 & 8: Potpourri This Evening May 18th/Bought More AT & T
And I recently violated the model by buying some stock ETFs, including VTI, VV, VEU, XLK, and XLI. While acknowledging the violation, my rationale was to buy these stock ETFs now, while still steep in the bear market, hold them as core positions, and then sell most of my remaining stock mutual funds well into the next bull market.  Most mutual funds were eliminated or pared substantially before 2008:  Buy High & Sell Low /Retrospective on the Good & Bad
I have not been impressed with the job done by these "professional" money managers, particularly in a bear market, where they have a tendency to go down more than their benchmarks by a considerable amount while failing to exceed their benchmark on a consistent basis during a bull market.  So I decided to go mostly with stock ETFs rather than mutual funds during the next bull phase.  At least with an ETF I do not have to  pay much for failure.  So, although my strategy of starting to buy some core stock ETFs now may  work out, assuming a bull market ever starts again, it is nonetheless a violation of the VIX model which has so far saved me a lot of money.  

2. Stimulus Money Moving too Slowly, And What is Flowing is not Creating Many Jobs:  My local paper, The Tennessean, recently ran a story that only 544 million of the 5 billion in stimulus money had been spent so far in Tennessee.  This has done nothing so far to alleviate the unemployment problem which rose to 10.7% in May from 9.9% in April.  Most of that 544 million did not go toward projects which would create jobs.  Instead, the federal money was used to extend  unemployment benefits and to fund health care for the poor.  While we can debate whether or not transfer payments were the best use of stimulus dollars, those payments do not create jobs, and that can not seriously be debated.  Possibly, in some localities, a government worker was not laid off, but that is about the extent of it.  Mort Zuckerman made this very point in his recent editorial in U.S. News and World Report  US News   The debate is just starting to heat up about how many jobs will actually be created with the 787 billion dollars.  CBS News  So far at least, it is clear to me that there has  not been much bang for the bucks actually spent. 

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