Don,
I don't want to appear overly bullish here, or to be making any predictions that a bottom is "in", but I do try to put what I see in the charts in some historical context. Being relatively new to all of this, I am constantly looking back to see what happened before.
I agree with what you say about there being a difference between fear, and EXTREME fear, but I wonder how many times the market has to go through these extreme events. If you look back at the history of the SPX and VIX you certainly find a high degree of correlation between market declines and VIX peaks, and a few extreme events, but you also find significant market bottoms where the VIX did not go to the moon.
I did a little spreadsheet calculation on the SPX declines going back to 1992 (I only have VIX data back to 1993), identifying the weeks where SPX made a low compared to the prior and subsequent week. Then I calculated the % decline to that low from the highest point in the prior 15 weeks, and found the highest VIX associated with each low.
There are 13 points where the decline was 10% or more, one in 1996, two in 1997, three each in 1998 and 1999, and four in 2000. Only two of these bottoms were accompanied by VIX peaks below 30, the ones in 7/96 and 4/97.
There are 33 points where SPX declined between 5% and 10%. These are relatively uniformly dispersed between 1994 and 2000, but none in 1995. One third of these have VIX peaks between 30 and 37, with one at 40.4, while 2/3 are below 30. Last week falls near the top of this latter group with decline = 7.23% and VIX peak = 27.04.
There are 40 points where SPX declined less than 5%, with only 10 after 1996, only 1 of those in 1999, and none in 2000. Of these, only 2 had VIX peaks greater than 30, with another 4 between 25 and 30, and 5 between 20 and 25. Below 20 the distribution is roughly uniform with the lowest VIX peak at 12.1.
What does all of this mean? Well, it doesn't mean we can't go lower, that is for sure. But it does suggest that EXTREME volatility and sudden market declines are characteristics of the relatively recent bull market, something which many of us believe has run out of steam. It can be argued that the general decline in VIX over the last few months, and the lowering of VIX peaks associated with market bottoms is a gradual return to a more rational market where exuberance is being tempered by a continual fear that something terrible can and will happen when fear is forgotten. This year (2000) has already had as heavy a dose of major declines as any year, and while another major decline is certainly possible, there is no statistical evidence that it is more likely than a gradual return to a more steady state condition.
There are a few other things I've been looking at that technically suggest a near term bottom. A 13/8 stochastic on the daily charts of the indices seems to be well correlated with recent peaks and valleys, and all of them (SPX, COMPX, DJI, OEX, SOX) have crossed over at significant bottoms, with the VIX 13/8 crossing down from the highest level it has been since August 1999. Of course this could fail, but it has not for quite some time. SOX is really struggling, and as you have suggested, may be the killer here. A few more bad AAPLs could certainly spoil the bunch.
Dan |
