Wednesday, 22 February 2012

Volatility – floored

Since last August, the VIX has been in a pretty standard death spiral, all the way from 49 to 16 across 7 months.

The 4 year weekly chart gives a great view of the nonsense we've endured since 2008. The initial panic-hysteria 'OMG, its the end of the world', to the flash crash 'is it ending for real this time?' last summers 'surprise!, you just got downgraded' sell off.

VIX 2012 - Its all about 49

If we see the VIX break 49 at any time, the bears can start to party. A break into the 50s would likely not end there, and should offer at least a brief foray into the mid 60s. Anything above 65 is twilight zone area, and its impossible to even remotely guess if that is possible in these increasingly manipulated and HFT-induced sick markets.

So, be mindful of 49 being hit. Of course, 48/51 would make for a typical fail zone, at which point the market could floor, and then off we go again on another stupid low-vol' melt up for six lousy months.

The ultra-doom VIX chart.

The following chart is just a rough outline of the style that many of the doomsters out there in the murky corners of the web are touting. Some have overly said it already, but many are just hinting at what they are looking for.

Lets be clear, if the wave'1 and 2 (that many chartists have touted since last summer) have been correctly identified, then 3' is obviously next. Whatever the reason for such a 'doomer 3' to occur, what matters is that a 3 would likely last 6-9 months (the 2008 wave'3 lasted 10 months), and would broadly lead to a VIX as follows...

Sure, its highly improbable that the above will be even remotely the outcome for 2012, but the style would be correct, 'if' a market index '3 wave' were to occur.

VIX strategy

I don't like VXX -its a failed ETF (or ETN?), TVIX is certainly the new traders drug of choice – volumn looks set to hit 150/200 million on the next big down day this year, whilst the VIX itself breaks back into the 30s.

Personally, I'd be tempted for near strike April VIX calls, somewhere in the $25 strike area. For the ultra doomers, 40s would be just about acceptable (although preferably for May, or further out), but..those are crazy unstable, severely prone to decay, and will implode to zero quickly if the VIX does not break into the high 20s.

HPQ -they do make nice printers (mine is 12yrs and still working)

Earnings were reasonable, but it looks pretty weak as a longer term stock. The P/E is still only 6-8, that is relatively cheap/fair value. Yet where is the excitement in this company? Err, no thanks. The market does not seem to like the CEO Whitman, another year..and she probably gets the boot.

*AH action, 27.90 was hit...currently 28.90..almost evens from the close. Hmm.

Well, the VIX remains something to watch in the coming weeks, the prime time for 'explosive action' would be in about 3 weeks - when the weekly cycle momentum goes positive cycle.

Good wishes!