I wasn’t able to do much charting and analysis this week.
I'm taking a step back from charting the next few weeks as I finish a project.
I wanted to get this last chart out that I have been working on for historical look at the vix.
Why is the VIX so important?
I would argue that the VIX is the most important indicator in a speculators arsenal.
The vix is important because after a volatility event the vix will do what it does.
Revert to Mean.
To see this phenomenon in action all you have to do is a regression trend of VIX from ~2003 to pre-march 2020 to find the mean for VIX is 15.39
Next add another regression trend line sine the Covid 19 Spike and you will see that it took Oct 25 for the VIX event mean return to historical mean.
So a speculator like me can conclude that the Crash of 2020 has completed its mean reversion.
What was the cost you ask?
To determine that, just extend the regression trend to now to find the current mean and WHAT THE HELL!
A trend line formed from the completion of the mean reversion for covid to today and we see that the VIX Mean overall has now risin to 19.70.
This is huge as a speculator because it gives us a variable to use in our analysis and some assumptions we can make to predicting a trend after an event.
1. When a crisis occurs, the government will step in to correct it with QE in some form.
2. After a large volatility event or even a bear market selloff, we can estimate an amount and time to reversion.
Everyone has questioned why the Fed kept the peddle to the QE meddle.
Well now you know why, to give the markets time to revert to mean.
The bigger the spike, the more QE and/or time it will take to revert to mean.
OK Then. Can the VIX predict a crash?
I think it can and already is pointing to a near term event.
If you compare the 08 GFC you will see 1 important trend of VIX since Jan 07 is a steady increase in volatility until the market eventually crashed.
Unlike the March 2020 event which was spontaneous pop in VIX.
Now you see, since mean reversion completed in Oct 25th, a steady increase in overall market volatility has taken hold.
While the market still mean reverts after a bear leg selloff, that overall mean continues to rise.
So How long before it pops?
While 07-08 rise in volatility prior to its crash gives us some indication an event is imminent, it won’t be the same.
I suspect it will be sooner and larger than anyone expects.
If you look at 07-08s incline, It indicates we are knocking at the doorstep.
It’s why I think VXX stopped issuing in March.
It’s why we get such crazy market rallies in the middle of a “recession” and inverted yields.
Everyone knows there is something wrong, the FED is waving their arms in the air like they just don't care.
OK smart ass, then why won’t the markets crash.
It’s because capital markets of today are much more reflexive than they were in the past.
Since 2018, options began increasing in volume and popularity.
Now, the dealers that sell those options, aka house the risk (or lack of risk) need to dynamically hedge their delta.
When 1 dealer is offside from dealer 2, you can expect they will continuously hedge back and forth until….
They reach mean.
This isn’t an overnight process and takes about 21 days in my estimation and is the VANNA and CHARM effects so prevalent in the markets over the past 2 years.
It’s why there were such predicable dips every 19th during 2021.
It’s why we got a huge bear rally this summer. (Volatility Compression).
It’s why every golden cross has a death cross.
It’s why moving averages provide hints to direction.
OK, OK. This makes sense.
But Why?
Massive amounts of Delta hedging.
I broke down one of the largest hedges wrapped around todays market equities and mapped out the strategies Delta graph.
Delta is simple to understand and once you can visualize negative and positive delta you can extrapolate the zones of volatility.
Once you map those zones to changes in volatility you have a good base to start marking assumptions.
VIX Log Returns moving average.
In the bottom panel I created a log return moving average that can give you a magnitude of movements.
Ranked from 0-10 in increased volatility you can see that covid 19 moved the volatility scale the most in history with a 9.0 in the VIXTER SCALE.
This scale can also move negative to -5
For each spike high there is always an equal push negative to bring volatility back to mean.
With all this knowledge we can form a picture in our mind of a trampoline.
The tension (or reflexivity) in the trampoline are the dealers pulling liquidity to their side. This includes all the hedge funds, market makers, bulls, bears, prop traders, theta gang, tsla gang, retail, institutions, etc are all pulling the trampoline tighter to their side.
Each economical decision or crisis is going to launch VIX that much higher.
That is until the trampoline breaks under the pressure.
The FED saved banks and corporations after Covid with Stimulus, not the checks you got in the mail (those take time to trickle down to corporations), but the debt they were buying and adding to their balance sheet.
That is a massive 9 Trillion dollars.
That gave our trampoline the added support it needed to recover.
What happens now when the FED puts that 9 Trillion in assets back into the market.
The tension grows until the next crisis or event launches it to 10.
Then it's...
So long and thanks for all the Fish.
I'm taking a step back from charting the next few weeks as I finish a project.
I wanted to get this last chart out that I have been working on for historical look at the vix.
Why is the VIX so important?
I would argue that the VIX is the most important indicator in a speculators arsenal.
The vix is important because after a volatility event the vix will do what it does.
Revert to Mean.
To see this phenomenon in action all you have to do is a regression trend of VIX from ~2003 to pre-march 2020 to find the mean for VIX is 15.39
Next add another regression trend line sine the Covid 19 Spike and you will see that it took Oct 25 for the VIX event mean return to historical mean.
So a speculator like me can conclude that the Crash of 2020 has completed its mean reversion.
What was the cost you ask?
To determine that, just extend the regression trend to now to find the current mean and WHAT THE HELL!
A trend line formed from the completion of the mean reversion for covid to today and we see that the VIX Mean overall has now risin to 19.70.
This is huge as a speculator because it gives us a variable to use in our analysis and some assumptions we can make to predicting a trend after an event.
1. When a crisis occurs, the government will step in to correct it with QE in some form.
2. After a large volatility event or even a bear market selloff, we can estimate an amount and time to reversion.
Everyone has questioned why the Fed kept the peddle to the QE meddle.
Well now you know why, to give the markets time to revert to mean.
The bigger the spike, the more QE and/or time it will take to revert to mean.
OK Then. Can the VIX predict a crash?
I think it can and already is pointing to a near term event.
If you compare the 08 GFC you will see 1 important trend of VIX since Jan 07 is a steady increase in volatility until the market eventually crashed.
Unlike the March 2020 event which was spontaneous pop in VIX.
Now you see, since mean reversion completed in Oct 25th, a steady increase in overall market volatility has taken hold.
While the market still mean reverts after a bear leg selloff, that overall mean continues to rise.
So How long before it pops?
While 07-08 rise in volatility prior to its crash gives us some indication an event is imminent, it won’t be the same.
I suspect it will be sooner and larger than anyone expects.
If you look at 07-08s incline, It indicates we are knocking at the doorstep.
It’s why I think VXX stopped issuing in March.
It’s why we get such crazy market rallies in the middle of a “recession” and inverted yields.
Everyone knows there is something wrong, the FED is waving their arms in the air like they just don't care.
OK smart ass, then why won’t the markets crash.
It’s because capital markets of today are much more reflexive than they were in the past.
Since 2018, options began increasing in volume and popularity.
Now, the dealers that sell those options, aka house the risk (or lack of risk) need to dynamically hedge their delta.
When 1 dealer is offside from dealer 2, you can expect they will continuously hedge back and forth until….
They reach mean.
This isn’t an overnight process and takes about 21 days in my estimation and is the VANNA and CHARM effects so prevalent in the markets over the past 2 years.
It’s why there were such predicable dips every 19th during 2021.
It’s why we got a huge bear rally this summer. (Volatility Compression).
It’s why every golden cross has a death cross.
It’s why moving averages provide hints to direction.
OK, OK. This makes sense.
But Why?
Massive amounts of Delta hedging.
I broke down one of the largest hedges wrapped around todays market equities and mapped out the strategies Delta graph.
Delta is simple to understand and once you can visualize negative and positive delta you can extrapolate the zones of volatility.
Once you map those zones to changes in volatility you have a good base to start marking assumptions.
VIX Log Returns moving average.
In the bottom panel I created a log return moving average that can give you a magnitude of movements.
Ranked from 0-10 in increased volatility you can see that covid 19 moved the volatility scale the most in history with a 9.0 in the VIXTER SCALE.
This scale can also move negative to -5
For each spike high there is always an equal push negative to bring volatility back to mean.
With all this knowledge we can form a picture in our mind of a trampoline.
The tension (or reflexivity) in the trampoline are the dealers pulling liquidity to their side. This includes all the hedge funds, market makers, bulls, bears, prop traders, theta gang, tsla gang, retail, institutions, etc are all pulling the trampoline tighter to their side.
Each economical decision or crisis is going to launch VIX that much higher.
That is until the trampoline breaks under the pressure.
The FED saved banks and corporations after Covid with Stimulus, not the checks you got in the mail (those take time to trickle down to corporations), but the debt they were buying and adding to their balance sheet.
That is a massive 9 Trillion dollars.
That gave our trampoline the added support it needed to recover.
What happens now when the FED puts that 9 Trillion in assets back into the market.
The tension grows until the next crisis or event launches it to 10.
Then it's...
So long and thanks for all the Fish.
Comment:
Here is the S&P from Oct 97
2 years of vol compression shows the regression median was the bottom of a flash crash caused by price corrections from broker-dealers.
2 years of vol compression shows the regression median was the bottom of a flash crash caused by price corrections from broker-dealers.
Same pattern of increased mean volatility prior Oct 97 crash.
From SEC. Finds overview below.
The Division's trading reconstruction indicates that the steep market declines on October 27 and the morning of October 28 appear to have been a price correction along the lines of that experienced over October 13 and 16, 1989.10 The selloff on October 27, 1997, appears to have been prompted by concerns over the potential impact on U.S. corporate earnings of the growing market turmoil in Asia and the repercussions from the potential economic slowdowns and deflationary pressures. The Asian market turmoil, coupled with the historically high U.S. stock market valuations, evidently caused a number of institutional and professional traders to attempt to reduce their equity exposure or increase their hedges in the U.S. markets, either directly through stock sales or indirectly through trades in futures. Various trading strategies and overall liquidity constraints in the stock and futures markets, as well as concerns over the potential early closure of the markets on October 27, may have contributed to the velocity of the price declines in the afternoon. There was, however, no single factor that emerged as the cause for the price volatility during this period. When the selloff reduced U.S. stock prices to attractive levels on the morning of October 28, broad-based buying developed to support a strong, albeit partial, bounce-back in share prices on then-record trading volumes.
Our trading reconstruction indicated that, out of the 20 largest sellers in the sample stocks, eight were broker-dealers trading for proprietary accounts,11 three were mutual fund complexes, and nine were institutions.