Monday, June 20, 2011

"On the Pointlessness of Following the VIX" (VXX; TVIX; XIV)

Two words: Mean Reversion.
While Jeremy Grantham called profit margins the "most mean reverting series in finance" the VIX has to be a close second.
And for newbies to this racket the XIV is the VelocityShares Daily Inverse VIX Short-Term ETN.
From MarketBeat:
The VIX is down nearly 4% today, to roughly 21, retreating quickly from its three-month intraday high last week of nearly 25. Does this mean we should expect more gains in the stock market? Probably not, according to S&P chief equity strategist Sam Stovall.
That’s because the CBOE’s volatility index, often inaccurately called the “fear index,” pretty much tells you nothing about the future whatsoever, Mr. Stovall writes in a note today.
Could investors have anticipated that a decline in excess of 5% was coming, based on a pick-up in volatility, be it intra-day or day-to-day percent increases in the S&P 500? I have found that volatility is more a coincident or lagging indicator, than a leading one. Since 1950, during any given 20-day period, the S&P 500 saw an average 15 days in which intra-day volatility exceeded 1%. Yet this volatility measure fell to below 5 just before the S&P 500 endured the four recent declines of 5% or more....MORE