1. VIX AND VXD: The VIX closed at 24.76 on Friday, down 3.54%, and the DJIA volatility index fell 3.43% to 22.26. Both have come a long way from their peak levels during the fall of 2008. I view the movement toward 20 to be a positive. The DJIA is the more stable index and I would expect the VXD to fall below 20 first. That is the demarcation line separating long term bull and bear patterns. Vix Asset Allocation Model Explained Simply With as Few Words as Possible Sure, the S & P has risen markedly off its low in March, but it had to rise a lot just to recover what was lost earlier in the year. The pattern so far is consistent with both a bear market rally and the start of a longer term bull market. More time is needed for the market to heal itself from the major damage caused by the near collapse of the world's financial system last summer and fall.
Under my VIX Asset Allocation model, the signal for the start of a longer term bull market, generally lasting for 3 or more years, is continuous movement in the VIX below 20 for several weeks coming out of the Unstable Vix Pattern. I generally use 3 months as a guideline but that is not a hard and fast rule.Multiple Confirmations of VIX Model-Canary in a Coal Mine Once that kind of stability is found in the S & P 500 index, enough people feel comfortable and secure about the future to invest with more than a fleeting confidence in the outcome. Stability is a necessary predicate for a lasting bull move, and we are moving toward stability this year. The VIX started the year at 40, moved up the mid to high 40s in February and March (with some readings over 50) and has been trending down toward 20 since the March 9th close of 49.68. So, we have come a long way this year, back to the levels last seen in the VIX prior to the Lehman bankruptcy. If I had to make a prediction, with maybe a better than 50/50 chance of occurring, I would anticipate now that the VIX would make its first tentative move below 20 in September, and possibly, with a helping of good fortune, will have several weeks of continuous movement below 20 before Christmas. If that occurs, I would suggest then comparing the VIX charts coming out of the 1990-1991 bear and 2000-2002 bear markets. (see, e.g.: VIX and S & P Compared 1990 to 1997)
In a prior post, I drew attention to how long it took to return to stability after the 1987 crash. The CBOE does not provide VIX data from that time, but there was data on a volatility index for the S & P 100-VXO. It took about a year to recover from the shock. More on the Vix Model: What it Does not Predict is as Important as What it Does/Parallels to VXO 1987-1988 The VIX Model did anticipate the 1987 crash with a Trigger Event in April 1987. Moreover, the volatility levels experienced in the VXO were more extreme than the levels reached by the VIX after the Lehman failure. I also have drawn attention to the time period for recovery in the Nasdaq volatility index after the dot-com crash in 2000-2002. It just takes time to heal the wounds. Parallels Between VXN 2001-2002 and VIX 9/08 to__ ?/Commodity ETFs Sunday Evening Potpourri May 31 2009That pattern suggested to me that the volatility index has to first find stability in the 20 to 30 range, after a major spike, before volatility could move below 20. The VIX now appears to me that it has found stability in the 20 to 30 range, still an Unstable VIX Pattern under the VIX Asset Allocation Model, but a necessary predicate to moving into a Stable VIX Pattern, indicated by continuous movement of below 20.
2. David Rosenberg and Alan Abelson-Redux Ad Nauseum: I predicted yesterday that Alan and David would hold a confab after the unemployment report, try to figure a way to spin a negative view of the report, and Alan would pump Rosenberg's views in his Barrons column today. Guess what, that is exactly what happened-and I did not need to bust a brain cell or go out on a limb to make that prediction: Jobs Report-Better than Expected/Recession Kaput/POM, BAM/Bought 100 JDD in Roth Somehow, it has not dawned on David and Alan that the direction of change is important, or that recessions do come to an end. Before there can be net job creations, the rate of job losses has to stop and then start to turn back up toward job creation with fewer and fewer job losses. We have now moved in a few months from job losses accelerating to over 700 thousand a month to over 200 thousand during July. The trend is apparent to virtually anyone who does not view all data with a prism of negativity. I will make another prediction. Once the economy starts to create jobs, maybe by this the end of this year, perma bears will find either another peg to hang their hat or will dish the job creations as a mirage or a temporary phenomenon. Remember, their normal is that more bad news is coming, nothing ever improves, the worst will continue indefinitely, the seasons never change, darkness will always be for a continuous 24 hours, for every day and every year until we all die. I can only say that Alan and David would have kept individual investors out of the stock market for a 50% run, and David would have had investors in the 10 year treasury that has lost a lot since his recommendation back in April. ( Item # 2: How reasonable is a prediction of a 2% 10 year treasury yield and 475 on the S & P 500 Hey, David, this 10 year treasury chart does not look so hot to me, unless you are short of course since the start of 2009: MDC - Java Chart - WSJ.com Alan was previously touting that recommendation: Barrons.com You have to keep in mind that Rosenberg was predicting on April 2nd a catastrophe, with a fall in the S & P 500 to the 475 to 600 range: Rosenberg Does that look ridiculous now to everyone other than his pal Alan.
I mentioned in an email this morning to a reader that someone like Rosenberg may end up being right about the future for the wrong reasons. I gave an analogy to the rich blackjack player who split a pair of face cards and won the hand, discussed in an earlier post: Investing process with a story illustration Sure, he made a correct call about the housing market being on an unsustainable course. That was hardly a unique opinion. The rise in housing prices needs to be tethered to the rise in incomes, and incomes were not rising 20% a year. Professor Shiller made that very point in 2005 in the forward to the new edition to his book Irrational Exuberance. Real Estate and 'Irrational Exuberance' : NPR Irrational Exuberance (book) - Wikipedia, Shiller was making an obvious point, and I had no problem agreeing with him in 2005 when I read the new introduction at one of my local libraries, Barnes & Noble or Borders. For everyone else who refused to see the problem developing, some may just have trouble distinguishing between the reality that they create in their own minds and what is actually real. Some may have just been blinded by greed and dollar signs which was certainly true for the Masters of Disaster that provided the fuel for the fire to come. Many simply do not have the time to focus any attention on these kind of issues. Some are just too ignorant about virtually everything happening, including the lessons of history, and would in Santayana's word be doomed to repeat the same mistakes made in the past. That is admittedly not a politically correct statement to make, but nonetheless true. Others may "remember" but learn nothing from the experience, possibly due to the distortions of what happened occasioned by a rigid ideology that warps all information to fit the pre-existing worldview, which is undoubtedly the case even now with the wrong lessons being drawn by many about why the near Depression happened.The Most Abused Word: Reform/Buys of IR & DD/Santayana: An Inability to Remember History or Just Creating Your Own Reality to Fit an Ideology Fail to Remember or Refuse to Learn? But whatever the reason, it was not a difficult call to make, the only issue being the timing of the implosion. The realization of what was happening certainly made me take proactive measures in 2007.
3. Miscellaneous: In a Barrons article written by Jack Ablin, who makes several bullish points as to why the market can rise from current levels, he notes that the S & P 500 is now selling at about 1 times sales. I will frequently use that measure, along with many others, in assessing a stock investment, and one times sales is not expensive. Some of the lottery tickets that I have bought recently, which have spiked in price, were selling at significantly less than 1 times sales and even less than their book value.
I noted that the post office was going to lose 7 billion this year. While their volume way down due to email and the recession, the NYT pointed out that the Post Office's benefits are so generous that it could save 600 million a year by just bringing those benefits in line with federal employees. That is not going to happen.
I do not have a problem with Andrew Bary's column in Barrons about the disconnect between timber prices and the price of timber stocks. I only own only 50 shares of a company called Timberwest as a lottery ticket. At least some of the fall in timber prices can probably be traced, however, to the decline in housing which started to pick up steam in 2007. Once the housing market starts to recover, it would be reasonable to expect some recovery in lumber prices, but I still agree with most of what Bary is saying in his column.
I saw in the "research reports" section of Barrons a note that JMP Securities had reiterated its outperform rating on CB Richard Ellis and a $14 target price after the release of CBG's 2nd quarter earnings. I recently rode one lottery ticket purchase of CBG from $2.39 to $9.73, and still own the other part of the lottery ticket bought at $3.49: SOLD 1/2 CBG/ CB Richard Ellis/Mortgage Rates/
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