In last Thursday’s article I mentioned how volatility and the VIX have specific
inherent features that allow you to identify short term reversals in the stock
market. Today, we will look further into this topic.
As was discussed on Thursday, all volatility is mean reverting and
autocorrelated. We also discussed the VIX moves to extreme levels and reverses
as the overall market reverses. One of the better ways to exploit this
information is by combining a 5 trading day high/low of the VIX with an
intraday reversal (of the VIX). Our research has shown that when the VIX makes
a 5 trading day high and closes the day at a level BELOW where it opened,
there is a higher than average likelihood that the market will rise over the
next few days (CVR I in the Market Bias Page). The higher the number of
trading days the VIX makes a new high, the more likely the stock market has
made a short term low. The same is true for market selloffs. A 5 trading day
low of the VIX combined with a close ABOVE its open, usually signals a short
term top in the market.
In this Thursdays column, I will explain to you why this method works and how
you can best exploit it.
TRADING THOUGHTS: The volatility on many of the interest sensitive sectors is
well below normal. The four indices that stand out are the Utilities Index,
the Insurance Index, the Real Estate Index and the Banking Index. Expect a
larger than normal move shortly in these sectors and their underlying stocks.
In the Futures market keep an eye on the Yen. It’s poised to explode.