CI's Exposed!!
Aaron Task, Realmoney:
We Got the VIX
Few aspects of market analysis are as compelling as market sentiment, and few sentiment indicators attract as much attention as the CBOE Market Volatility Index, or VIX.
Many skeptics are convinced it is nearly impossible for the market to advance
with the VIX trading at the relatively low levels it has recently been at. The VIX
has been under 30 throughout 2002, more recently residing in the low 20s;
today the VIX rose 3.1% to 21.97 after trading as high as 22.58 and as low as
21.55.
The intense focus on the VIX is one reason many participants were caught off
guard by the market's rally from its Feb. 21 lows (which appears to have
ended), Michael Paulenoff, president of 2MStrategies.com commented here on
Friday. "The more folks watch and trust it, the more likely it will elicit a false
signal."
The VIX has been ascribed predictive powers that may not be warranted,
according to a recent report by Merrill Lynch's equity derivatives strategy
department.
"In answering the question as to whether the VIX can predict future returns, our
conclusion is that the evidence is very poor," the Merrill report states.
Since 1986, the S&P 500 rallied during one-month periods following a relative
one-year low for the VIX in 59% of cases, Merrill found. The same is true of
returns for one-week, three-month, six-month and 12-month periods.
More recently, the VIX has performed better as a market forecaster, but still
not well enough to prudently be used as a timing device. Since 1998, the S&P
has fallen in only 60% of the cases following a relative one-year low for the
VIX, Merrill reported.
"We can't rule out that the VIX can be used as one input in conjunction with
others in determining market direction," the report states, noting the high
correlation between the VIX and "contemporaneous" market returns.
Specifically, the VIX has risen as the market has fallen; since 1986, the VIX has
fallen in only one of the 59 weeks in which the S&P 500 fell by more than 3%.
"But ... when used in a simple fashion as a predictor of future returns, over the
long run [the VIX] has not appeared to be particularly accurate," Merrill
concluded.
Again, this doesn't suggest you should toss the VIX out of your tool kit; just
make sure it's not the only indicator in there. |
