Tuesday, October 8, 2013

Follow Up; It's the Implied Vol of the VIX that is Our Signal; Did a Bi-partisan Congressional Vote Bring us to the Brink of Another Great Depression?


VIX spot closed Tuesday trading at 20.34%, up 4.8% with IV30™ DOWN 11.4%. The LIVEVOL® Pro Summary is below.



The markets closed down across the board Tuesday. I have included the indices snapshot from LIVEVOL® Pro, below.



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This is a follow up to the post I published on Thursday, Oct 3 (last week). You can read that article by clicking the title below:
VIX - Doomsday Scenarios; It's Not the VIX that Matters; It's the IV of the VIX That is Our Signal.

While the market is tumbling and panic may be setting in, I actually say, as of this writing on the close of Tuesday, that we're not in panic mode yet and I see that not in the VIX (which is ripping), but in the implied volatility of the VIX. Here are some snippets from the prior post:

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The political stand-of will end. It might take a long time. The US may even default on debt payments (unlikely, but possible). A downgrade of US debt is more likely and remember, the debt rating is based on the highest rating. S&P already downgraded the US debt... What if Moody's does too?...

So let's walk along the string that looks to a catastrophe. Downgraded US debt --> defaults on outstanding debt. Then what? Will the country have a shutdown government forever?

My best bet would be no. If you want to get the real pulse of the market, you can look at the VIX, but it's the vol of the VIX that will really tell you where we are. If the implied volatility of the VIX breaches 115%, that would represent a multi-year high; and that could be a signal of a doomsday market reaction (but not necessarily a doomsday reality). Watch that number. If it closes above 115%, I think a market spasm is a real possibility b/c fear could overpower the market. Until then, I see posturing and fear of fear, but not necessarily anything else.
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Here's the thing, the implied volatility of the VIX did touch that multi-year high (and close there) on Monday. I have included a two year IV30™ chart of the VIX in isolation, below. Keep in mind, this the volatility of the VIX, not the VIX itself.



I circled the closing high on Monday as well as the level today. As I wrote on Twitter and StockTwits (@Ophir_Gottlieb or @Livevol_Pro), that Monday close put us on the brink. But look what happened today. The market fell hard, VIX even rose, but the implied volatility of the VIX actually dropped. The result, a down day, but no panic.

Not yet. I'll repeat my speculation (that's what it is, a speculation), if (and it is an "if") the IV30™ of the VIX blasts through that 115% level and rises again the next day, then we may very well be in the realm of consecutive daily 2%+ moves in the market (so 300+ Dow points or 30+ S&P points). If that day arrives, then the 'Doomsday Fear' could overtake the market -- albeit temporarily. Watch for that day - it may be here soon and we may have a forward indicator to warn us.

On a political note, sorry to get off the beaten path, does anyone else think that the 437-0 bi-partisan vote in Congress that allowed for back pay to furloughed government employees may have been the single riskiest event in this county's history over the last 30 years? Doesn't that mean that the pressure to stop the government shutdown has been released in the immediate-term, making the likelihood of a gigantic disaster (a US default on debt) ever more likely? Think about this one for a sec -- a bi-partisan vote may have brought us to the brink of the greatest depression in the history of the world. Unfortunately, I'm not exaggerating. May calmer heads prevail...

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