Posts filed under “Markets”

VIX Needs a Friend

A quick note on Harry Schiller’s interesting and thought provoking article on the VIX at RM:

For a buy indicator, few things in life beat a spike in the VIX over 50. But as a shorter term sell indicator, I’ve gotten better results — and more consistently — using the VIX in tandem with one or two other signals.

Two examples:  On October 16 2003, using the VIX signal alone, I sent a note to clients that the VIX was foretelling a short term correction. And while the Nasdaq did see a subsequent 100 point drop (1966 – 1842), it was hardly a tradable call. Indeed, 2 weeks later, the Nasdaq was back over 2000. 

Using the VIX in conjunction with other signals raises the success rate. One of the best calls I’ve made was on January 22, 2004. In a note to clients, "Market Flashes Yellow Caution Light," I observed that in addition to the VIX:

"Several other sentiment measures have also caught our attention. We
noted the stunningly low 10.11% Bearish sentiment amongst AAII survey
takers previously. That is significant because of the investor tendency
to become bullish after buying equities – not before. So few Bears
around make us wonder who else is left to be “converted” into buyers.

Yesterday, yet another signal caught our attention: The Put/Call ratio. As measured by the CBOE, the ratio dropped to 0.33 on January 21, 2004. We have not seen a data point that low since 12/26/97, when the ratio registered a mere 0.30 following the Asian currency crises (precipitated in large part by LTCM).
The last period with a data series between 0.35 – 0.40 was during
February to July 2000. You may recall the subsequent period as somewhat
uncomfortable for those who were exclusively long.

While the VIX is worth watching, recall that early 1990s saw the VIX in single digits for several years . . .


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Granville Predicts 2005 Dow Crash

Joe Granville is a very well regarded technician (now in his 80s) who has had some terrific calls in his career, and a few duds  as well. On Bloomberg, there was a story on his most recent commentary, but I cannot seem to find it now; It more likely got moved than disappeared for nefarious reasons.

Anyway, Joe just got Bearish big time. Here’s an excerpt:

"Joseph Granville, who accurately forecast in 2000 that U.S. stocks’ bull market would end, is at it again. He expects the Dow Jones Industrial Average to suffer its biggest annual loss this year since the Great Depression.

“We’re in the critical portion of a coming collapse and the market’s screaming to get out,” said Granville in an interview from Kansas City, Missouri. “Everyone’s bullish. There’s going to be a tremendous surprise and it’s going to be to the downside.”

"Granville, publisher of the Granville Market Letter since 1963 and a technical analyst for almost 50 years, also foretold a stock-market decline in 1976. He misfired in 1982 and 1995 by calling for losses before share prices surged.

The 81-year-old analyst expects the Dow average to retreat to at least 7400 by year-end. The forecast amounts to a plunge of 31 percent. The last year in which the benchmark fell that much was 1937, when it lost 33 percent.

As a technical analyst, Granville predicts the market’s direction by using criteria such as trading and price patterns, rather than earnings and economic growth. He started developing his stock market theory at what was then E.F. Hutton & Co., a New York-based brokerage, from 1957 to 1963."

That bodes well for my 2005 forecast, as Joe tends to be early. I’m still looking for one last strong move up — Dow 11,700, Nasdaq 2600 — before it all heads south. Note that also gives me the opportunity to stay long if the uptrend remains in tact.

One of the key mistakes to avoid – call it the peril of predictions — is to  never marry a forecast, especially your own. People wrap up too much ego in what is essentially educated guesswork. If you start with the assumption that your prediction is going to be wrong, its real easy to reverse yourself when necessary . . .

If you are interested in learning more about Granville,start with this article — Just Like Old Times as Joe Granville Yells `Sell’ — it gives some background on him if you are unfamiliar with his work.

Some more background on Granville:

Timing the Market

Joe Granville, father of the On  Balance Volume (OBV) and its analysis

Bibliography of Published Books


UPDATE: March 18, 2005  7:09 am
Mark Hulbert provides the details on Granville’s track record. Not impressive (unless you are a fan of the Black Swan event . . .)


UPDATE: I still cannot find this anywhere, but a friend captured the text. Here it is for your enjoyment:


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