Reversal Signals, VIX and Otherwise

bearonabike.pngSo the Striking Price Daily picked up on the sluggish VIX yesterday. They’re several days late to the party, as all the key options bloggers have been talking about this for awhile, but then what can you expect from a traditional media outlet? Anyway, they get the basic story right, but what’s with Pete Najarian stating the obvious?

“I’d like to see a three on the front number of the VIX to signify that panic has set in,” says Najarian. “That has usually been a great indicator that investors are washed out, and that is often a good time to start looking at stocks.”

Yes, we’d all like to see a huge VIX spike to signal some kind of obvious capitulation or turning point. But we might not get that this time around, and the thought occurs to us that maybe people are relying too much on this one indicator to track sentiment and “fear”. You know what happens when people get afraid? They start selling. Heavy, sustained selling pushes stocks down, even (gasp) below their 200 DMAs. So hint: check the % of stocks that are below their 200 DMAs on any of the major indexes, and compare to prior market bottoms. Not quite as sexy an indicator as VIX chatter, but maybe a bit more reliable this time around.

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n+1 is always fun reading, but “Interview with a Hedge Fund Manager” finally gives us an excuse to plug them in this venue. Taste:

n+1: What’s a “ten-sigma event”?
HFM: Meaning that it’s ten standard deviations from the mean… meaning it’s basically impossible, you know? But it’s kind of a joke, because returns are very fat-tailed, so the joke that we always say is, “Oh my God, today I had a loss that’s a six sigma event! I mean that’s the first time that’s happened in three months!” It’s like a one in ten-thousand-year event, and I haven’t had one in the last three months.
n+1: So it happens all the time?
HFM: Those kind of things do happen, yeah.

Be warned: n+1 is a literary/intellectual/hipster Brooklyn thing, so if you’re not careful you might get some culture on your tie.

[tags] options, trading, volatility, VIX, DMA, Najarian, n+1, hedge fund [/tags]


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Jared Woodard specializes in trading volatility as an asset class. With over a decade of experience trading options and other volatility products ... Read More

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