When VIX Rises and SPX Closes at a 50-day High

By Rob Hanna | February 10, 2012 | 7:02 AM |  0 CommentsTweet This

There were a few studies related to VIX action that appeared in the Quantifinder yesterday afternoon. This particular study looks at large mid-week rises in the VIX during times the SPX is closing at a 50-day high. All results are updated.

New readers may wonder why I use a day-of-week filter with this study. The VIX has a natural tendency to fall on Fridays and rise on Mondays. Because of this I typically separate out those days from the rest of the week when conducting VIX-based studies. Implications of the rising VIX and 50-day SPX high appear to be moderately bearish over the next few days, suggesting a pullback.

...

Some Perspective on the Nasdaq

By Michael Kahn | February 10, 2012 | 5:57 AM |  0 CommentsTweet This

This is a chart from yesterday's Quick Takes Pro newsletter.

With all the fuss over the Nasdaq reaching an 11-year high I took a look at the monthly chart.Yes, indeed, it is above last year's high and above the 2007 high so I agree with the assessment. But what I don't think is that this is a breakout, at least not a confirmed one.

On a scale this big, such a small move above resistance is still insignificant. It might get significant but right now it is not.

Look closely at the label, too. When the market breached this level for the first time in 1999 it was the start of the bubble.

...

Applying the QE Buying Power Index to Breakouts

By Rob Hanna | February 09, 2012 | 9:05 AM |  0 CommentsTweet This

I discussed the QE Buying Power Index a few times in the last week and demonstrated how it could be used as a filter for a mean reversion system. While a good number of people have signed up for the webinar there are likely also a large number of you who after seeing the mean-reversion results thought, “Who cares? I don’t trade mean reversion techniques.”

So I’ll show one more example before I get the blog back to regular programming. This time let’s look at the QE Buying Power Index and its impact on a simple breakout system over the last 4 years.

This first study below looks to buy the SPX any time it closes at a 5-day high and hold for X number of days. I also filtered to exclude any instances where the QE Buying Power Index was 3 or greater. (This is the same level used in the mean-reversion posts.)

As you can see it is red across the board. This would have been a losing strategy and not one with an edge.

Now let’s look at results using the same techniques but this time filter to only include those instances with a QE Buying Power Index of 3 or greater.

Huge difference here. The first couple of days are a bit of a crapshoot, but after that statistics turn strongly bullish. This again would suggest that if you are looking to go long the market you want to have Buying Power on your side.

Let’s look at a simple system designed to trade long when 1) buying power is strong, and 2) price confirms by making a new high.

Results here are very strong. Typical of a breakout strategy vs. the mean reversion approach the % profitable isn’t as strong but the winners far outsize the losers and the big wins bring in some hefty profits.

Learn how to compute the QE Buying Power Index in one of our special upcoming webinars. (Or sign up and view the recording if the times don’t work for you.) And you have nothing to lose, because they are 100% satisfaction guaranteed. (Guarantee relates to quality of the information, and is NOT a performance guarantee.)

 

...

S&P Nearing A Top? Revisted

By Ray Barros | February 09, 2012 | 9:02 AM |  0 CommentsTweet This

The tools compromising my approach to the markets are saying a S&P top is at  hand:

• Price - Structure: The 12-Month Swing and 13-week swing show we are in a sell zone.  Figure 3 shows that since the Dec 2, 2011 that the up move has been on declining volume and range. In this context this is bearish.
• Time: Kress Cycles suggest we are in a window when a top is likely.
• Momentum: Figure 4 shows that this up move has been on declining momentum.
• Sentiment: The sentiment indicators I use suggest the S&P is skewed to the upside.
• Normalised Volume: We saw a sell setup with ‘below normal range’ and ‘normal volume’.
• PoMo: For me, this indicator generated a sell signal today.

All that is needed is a strong directional down bar to generate a sell signal.  Perhaps Greece will be the catalyst, perhaps something else. As a technician, what I now want to see to confirm my bearish scenario is bearish price action. Until then, all I have are amber lights for my long positions. On these I have tightened my trailing stops and lowered my exit targets.

FIGURE 1 12-M Swing

FIGURE 2 13-W Swing

Figure 3 S&P Weekly Volume and Range

Figure 4 S&P Weekly Momentum

Figure 5 Normalised Volume Weekly

Figure 6 Normalised Volume Daily

...

Consider aTemporary Portfolio Hedge with a Volatility ETN

By Gary Gordon | February 09, 2012 | 8:45 AM |  0 CommentsTweet This

Volatility ETNs can serve as tools to protect assets that you already have in your portfolio. For example, 80% of the time over the last year, the iPath S&P 500 VIX Mid-Term ETN (VXZ) moved in the opposite direction of the S&P 500 itself. It follows that an active investor could purchase exchange-traded note protection if he/she is concerned about the magnitude of this seasonal stock rally.

How should you do it? Rather than sell economically sensitive U.S. stock ETFs in your mix – possibly subjecting yourself to short-term capital gains or potentially “throwing off” your allocation — you might purchase VXZ with a weighting of 5%-10%.

The downside of doing so is fairly straightforward. VXZ is likely to drift lower if the market moves sideways; it’s likely to sell off sharply if the S&P 500 experienced a parabolic rise from current levels.

Examining the downside risks, the likelihood of the S&P 500 going on a rampage after a 26% jump off the October lows seems somewhat remote. (Even bull markets tend to take “breathers.”) What’s more, the CBOE S&P 500 Volatility Index (VIX) is testing lows that haven’t held up for very long during the 3-year bull market period.

 

Even if the VIX broke to new lows, and the S&P 500 surged through 1400, iPath S&P 500 VIX Mid-Term ETN (VXZ) would probably be confined to a 10% drawdown from current levels. One can even use a stop-limit loss order to make certain of the outcome.

Now let’s look at the flip side of the coin. Stock assets across the board are technically overbought; Greece could still go awry; Syria and Iran are wild cards; market gains have removed some of the pressure for Europe to act quickly to prevent debt contagion; the U.S. economy is still growing at a pace that is far below trend. (Why else do you think that Bernanke is committed to 0% rates until 2014!)

In a pistachio nut shell, a flare-up is well within the realm of possibility… if not the realm of probability. Even a health-restoring pullback can occur with little-to-no provacation. That’s why a volatility note like iPath S&P 500 VIX Mid-Term ETN (VXZ) may act as a buffer if you’re more actively-inclined.

Over the course of the last year, ”VIX” volatility spiked on three occasions: (1) February tsunami-March “Arab Spring”, (2) August U.S. debt ceiling debate/September Eurozone debt fears and (3) November public referendum disaster by the Greek prime minister. From the low to the highs, VXZ gained 19%, 65% and 26% respectively.

Briefly, then, one might anticipate a 20%+ gain in VXZ during a significant spike in volatility. Moreover, it happened on 3 occasions last year alone, suggesting that the phenomenon is hardly infrequent.

While the small weight in the portfolio will not change your returns dramatically, it may certainly reduce total portfolio losses by 1.5% to 2%. That can be attractive when the world appears to be coming apart at the seams.

Again, iPath S&P 500 VIX Mid-Term ETN (VXZ) is best used as a trading tool… not a buy-n-hold-n-forget-it investment. I would consider VXZ at this particular moment because it is the furthest below its 50-day moving average (14%) at any point during the 3-year stock bull. That’s a seriously ”oversold” ETN in a seriously “overbought” market.

 

...

100