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Technology Stocks : Semi Equipment Analysis
SOXX 306.040.0%Dec 26 4:00 PM EST
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To: Return to Sender who wrote (8773)2/25/2003 1:16:21 PM
From: Sun Tzu  Read Replies (2) of 95640
 
Two points: First I could agree with you about the extreme measures. I just haven's studied it on VIX. What I do use in my own analysis is a measure of how many standard deviations is a stock (or index) away from its short term moving average (typically 3 or 5 days but sometimes longer term averages). The extremes are fairly predictive of extreme sentiment but are useful only for very short term trades. So in principle, I could agree with your stance on extremes of VIX. Keep in mind that these extremes happen after big drops in the market and that you are using VIX here as a contrary indicator to the often tauted "high vix means market will fall" principle.

Looking at the first chart you linked. In March and April SOX is forming a top. This is a normally a low volatility action and this time it was no exception. True to its nature, VIX drops during this time frame. If in fact it had been a good predictive indicator, it would have risen as its proponents claim. MACD would have saved you much better here.

Next the market is in full swing towards bottom. As I said, faling markets cause a rise in VIX (rather than vice-versa) and so VIX rises. In July it closes above 50 (as best as I can see in that chart) and then drops. This is the formation that often is mistaken as a "fool proof" indicator that a rally will ensue. However, again this is a false signal.

The VIX indicator is somewhat vindicated in August and October. But its track record remains around 50:50.

Sun Tzu
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