VIX and More

Sector Performance in the Last Two Bull Moves

2008-07-25T08:37:00.000-07:00

I have been fielding a bunch of questions about sectors, particularly oil and energy, over the past few days. Included in most of my responses has been a comparison of the March to May bull move and the most recent move that came off of the July 15^th bottom. Since I rarely repost content from my subscriber newsletter, I thought it might be a good excuse to cut and a paste a section from Wednesday’s newsletter on sectors:

Let me reflect on the nature of the March to May rally from SPX 1256 to SPX 1440, a gain of 184 points. As shown in the sector breakdown (top graph), there was strong sector participation across the board. Interestingly enough, energy was the top performing sector, followed by technology and materials. Financials fell in the middle of the pack.

Fast forward to the past six trading days and we have the SPX now 82 points above the low. This is not quite half the move of the March to May rally, but an impressive showing for a little more than one week of work. Note how the sector breakdown looks quite different in the current rally (middle graph). The extent to which financials have powered the recent move is impressive, if a little lopsided. Note that only financials are the only sector to have made larger percentage gains in the current rally than in the March to May move. In fact, besides financials, only the industrial and consumer discretionary sectors have made at least half of gains from the earlier rally in the more recent rally. All the other sectors have made gains of 3% or less, with energy and utilities showing losses.

The bottom chart uses the same data as the middle chart, except that percentage gains and losses are net of the performance of the S&P 500 index. This confirms that the financials are the only sector really responsible for moving the SPX. The consumer discretionary sector has provided a small lift and the industrials are just narrowly beating the SPX, but without participation from financials, this rally would have a much different look and feel.

Headwinds Again?

2008-07-24T18:58:00.000-07:00

I was traveling today and missed all of the market action. It certainly looks like it was an interesting day, as the headwinds index showed a turn back toward the old long energy and short financials trade. True the energy sector did not rise today (all nine of the AMEX sector SPDRs were down), but it did show some signs of stabilizing.

When I need to get caught up on the best of blogland, the first place I visit is Abnormal Returns, which has a knack for consistently cherry picking the best of what is out there.

For those who need a VIX fix, look no further than Adam of Daily Options Report in That Old VIX Magic, and long-time favorite Michael Stokes of MarketSci.com, whose The VIX Isn’t Magical is a can’t miss article today.

Note that Michael Stokes is one of many to weigh in on the question I posed on Monday: Does the VIX Have Market Timing Value? Check out the comments section for some interesting give and take from a wide variety of ably articulated perspectives, including a recent take from the highly skewed Kurt Osis…

I should be back at it tomorrow, same time, same channel, probably long natural gas and short the banks, maybe even nibbling on a few more VIX calls.

Headwinds Index: How Long Can Financials Outperform Energy?

2008-07-23T09:51:00.000-07:00

Two weeks ago, I introduced something I called the headwinds index, a simple ratio of financials (XLF) to oil (USO). It took another week for that index to bottom and the markets to rally, but since that bottom, financials have jumped 37% while crude oil has fallen 14% from its peak. The headwinds have turned into a strong tailwind, at least for the past six days.

The question, of course, is how long financials can continue to gain ground before a new long oil, short financials trade becomes too attractive to pass up. Several of my indicators suggest that the tailwinds are about to dissipate in the next day or two; after a strong opening, today’s developing gravestone doji also calls into question the staying power of the recent trend reversal.

At a minimum, I suspect the new tailwinds have gotten ahead of themselves. When they start to move back in the wrong direction, there is little reason to remain in the long financials, short oil trade past its useful life. As sailors are fond of saying, “tack on a header!”

Natural Gas Implied Volatility Spiking

2008-07-22T09:53:00.000-07:00

Perhaps it is just a coincidence that the “Oil VIX” appeared on the scene just as the implied volatility in oil futures (or at least as captured by USO) was hitting an eight month high. The “Oil VIX” (formally known as the CBOE Crude Oil Volatility Index; ticker OVX) and crude oil may get the lion’s share of the energy headlines, but lately it has been natural gas that has been making the more dramatic moves.

A look at the three month chart of UNG (the natural gas ETF that is the counterpart to USO), courtesy of the ISE, shows implied volatility steadily increasing over the past five weeks, with the gap between implied volatility and historical volatility continuing to widen – all while natural gas has pulled back about 27%.

Natural gas implied volatility levels are higher than oil implied volatility levels at the moment, and the pullback in natural gas presents some interesting trading opportunities. Some momentum players are already short here and some value hunters are buying on weakness, particularly if they believe in the long-term commodity bull and other supply and demand issues that are specific to natural gas.

The case for natural gas trading sideways from current levels is hard to make. Directional bets are expensive, due to high IV. Two trades I am looking hard at, with a bullish directional bias, are bull put spreads and call backspreads. The former limits upside and downside; the latter is more aggressive and more risky.

First Inspectd.com; Now Chartgame.com

2008-07-21T10:41:00.000-07:00

First there was Inspectd.com, a nice little site to practice your technical analysis skills with what is essentially a chart trading simulation program, where you start with $100,000 and use charts, moving averages, and volume to make long or short bets on the stock charts that are presented at random. This is a fun site that is both educational and addictive.

Upping the ante a little, now we have Chartgame.com. While Chartgame lacks the shorting option (even if you can "pre-borrow" the shares) of Inspected, it adds some all-important customizable indocators: RSI; MACD; and Bollinger. One other feature I like most at Chartgame is the ability to let time pass and optimize entries and exits rather be forced into the more limited buy/sell/skip now options that are available with the Inspected version of the game. This is a good way to sharpen discipline for entries and exits alike.

Technical analysis practitioners and aspiring TA students can learn a lot about chart pattern recognition from these two sites. I recommend giving them a test drive.

Time for Reader Input: Does the VIX Have Market Timing Value?

2008-07-21T08:56:00.000-07:00

I am going to try something different today: I’ll frame an issue in the context of an article from a highly regarded pundit, skip my own commentary, and ask for readers to weigh in with their thoughts. We’ll see how this works, if it works at all…

First, a quick summary of the pundit and the issue. Mark Hulbert, who I happen to think highly of, is out today with an interesting point of view in Putting on the VIX over at MarketWatch. The subtitle, “Commendary: Not necessarily bullish that VIX briefly rose above 30 last week” summarizes Hulbert’s position nicely, but I want to highlight several quotes from the article.

First, let me start with Hulbert’s conclusion:

“Even in those situations in which the VIX does appear to have statistically significant ability to forecast market movements, it turns out that those abilities largely derive from no special insights on the part of the VIX itself, but instead because of the stock market's tendency to rebound after steep corrections.

I owe this latter insight to Samuel Eisenstadt, research director at Value Line, Inc. Eisenstadt several years ago designed an econometric test to see if high VIX readings contain any unusual market-timing information after market declines, above and beyond the already-apparent fact that the market has just fallen. He came away empty-handed. High VIX readings tell us nothing more than we would already know from casually reading the news headlines.

The bottom line? The stock market may indeed continue to rally over the next several weeks. But if it does so, it won't be because the VIX momentarily rose above 30 last week.”

Early on in the article, Hulbert makes the case for the attractiveness of the VIX as follows:

“…consider first how the stock market performed over the subsequent month following a VIX close above 30: On average over the past 18 years, it gained 3.8% (as measured by the Dow Jones Wilshire 5000 index). In contrast, the stock market gained just 0.7% over the subsequent month following VIX closes below 30… Furthermore, similar contrasts existed at the quarter, six-month and 12-month horizons.”

Hulbert then goes on to refute the data for VIX closes above 30:

“…there's no way of knowing how high the VIX will rise when it first crosses the 30 threshold. Sometimes, like last week, the stock market immediately rises when that ceiling is broken, leading in most instances to the VIX falling back below 30. On other occasions, however, the stock market continues declining despite the VIX rising above 30, causing the VIX in most cases to continue rising. The all-time high for the VIX is 45.74.

So even though, other things being equal, higher VIX readings are more bullish than lower ones, there's nothing particularly magical about the 30 level.

To correct for this sleight of hand, I focused on just those occasions in which the VIX initially broke the 30 ceiling, after having been below 30 for at least three months previously. The data now painted an entirely different picture: Following those occasions, the stock market on average performed no better than it did the rest of the time.”

Readers, what do you think? Do you find Hulbert’s arguments convincing? Why or why not? What other important perspective and/or data do you think Hulbert is overlooking here? I would be interested in hearing some reader opinions in the comments below.

Are Commodities Reversing or Consolidating?

2008-07-18T08:01:00.000-07:00

It has been a dramatic week in the markets, with the long oil and short financials trade reversing hard and a number of the relationships that have been intact for the past nine months being thrown into disarray.

As I have been maintaining since early in the year, speculative money is likely to be flowing into either commodities or equities, but not both. That basic premise has not changed, but what has been called into question is whether the second half of 2008 will be more friendly to commodities or equities.

I believe the answer to the commodities or equities conundrum is that it is still too early to tell, but commodities still have to be considered the preferred asset class. Two charts below tell a good deal of the story. The first graphic is a weekly chart of the Reuters/Jefferies CRB index, which is heavily weighted toward energy. It shows that the recent pullback in commodities is consistent with previous pullbacks and consolidation periods. Neither the magnitude nor the duration of the recent reversal in the bullish commodities trend suggests that the bull market in commodities is winding down.

The second chart last appeared on this blog two months ago. It reflects the ratio of the commodities basket in the Rogers International Commodity Total Return Index (RJI) to the SPX. [RJI is an ETF linked to the Rogers International Commodities Index that has a broad weighting, with less emphasis on energy than most commodity indices] The ratio chart also shows much more of a consolidation ongoing in the present market environment than a reversal.

Of course, one more week of soaring financials and plummeting oil prices will dramatically change the tone of the chart, but for now at least, consider the commodities trend to still be intact (and susceptible to buying on the dips), which means the case for a reversal in equities is still a weak one at this stage of the game.

First Impressions of MSI Wind

2008-07-17T12:12:00.000-07:00

I have had a new MSI Wind ultra mobile laptop in the house for 24 hours now. This laptop has a 10” screen, 80 GB hard drive, Atom processor running at 1.6GHz, and is pre-loaded with Windows XP. All this comes with a footprint of only 10.2” x 7.1” and tips the scales at only 2.3 lbs. [full specs are available from the MSI site]

In the interest of full disclosure, I am such a laptop aficionado that in my two decades plus of computing, I have never owned a desktop. Back in the day, I toted around a Toshiba T1000 for two years on an airplane before I saw anyone else attempting to carry on another laptop; since then I have gone through literally dozens of laptops, including a 3.4 lb. Fujitsu LifeBook P7010 when those 10.6” screen models were first released several years ago.

So…when I saw the MSI Wind coming, I jumped.

My experience so far has been mixed. MSI has managed to stretch the keyboard out so that it takes up the entire 10.2” width of the machine (see photo). This is still almost two inches smaller than a standard laptop keyboard space, but the results are workable, given a little time to adapt. As is usually the case with non-standard keyboards, the problem is not so much getting used to a new configuration as it is alternating between that configuration and another keyboard.

So far the screen is the biggest limitation I have had to contend with. The 1024 x 600 resolution is certainly acceptable, but the issue for me is that there is not much in the way of real estate beyond what is required for email. It is possible to use a browser, but that experience is a little too much like walking around the house with a pair of binoculars strapped to your eyes. I can manage quite nicely with a 14” inch screen and find that a screen in the 13” range is workable, but at 12” and below I feel as if I have a mobile communications device rather than a laptop. Ultimately it all comes back to form factor.

So I am left to wonder if the proliferation of Asus Eee-inspired mini-laptops will find their niche. In all fairness, my wife loves the machine, but she uses it mostly for email and light browsing. You can always hook it up to a big LCD display, but then the other compromises seem more annoying: the undersized keyboard; the middling processor; etc.

I may have to wait for a foldable display and keyboard…

How 'Bout Them Earnings?

2008-07-17T08:03:00.000-07:00

Bespoke Investment Group has a surprising statistic out this morning: with 11% of the S&P 500 companies reporting, Bespoke has calculated the current quarter's EPS beat rate to be 72%. There are a lot of earnings reports still to come, but if it holds, the 72% beat rate will be the second highest in the past decade.

Even more impressive is the additional statistic that 34% of the companies that have already reported are in the financial sector, which has to be considered among the most earnings challenged in the current environment.

The beat rate will be an important trend to watch.

XLF Volume Spikes 3.3 Standard Deviations Above Mean Yesterday

2008-07-16T09:07:00.000-07:00

If I could pick only one ticker to watch in order to gauge the market’s health in the current environment, it would probably be XLF, the most popular of the financial sector ETFs. You could make an argument for RKH, the regional bank ETF, XBD, the broker dealer ETF, or any number of others, but XLF covers the entire financial sector, from Allstate (ALL) to Zions Bancorp (ZION).

With all the talk about the degree of a VIX spike needed to signal a bottom and other measures of capitulation, I am surprised I have not heard anyone else mention the volume in XLF yesterday. As shown in the graphic below, XLF traded over 469 million shares yesterday, eclipsing the previous volume record (set just last Friday), by over 150 million shares. The 469 million share turnover also represents 3.3 standard deviations above the mean, which translates into an extremely unlikely event. [Note that in the chart below, the Bollinger band settings for volume are for 3 standard deviations instead of the default 2 setting] This is capitulation-level volume in the sector that is most important to the stock market at the moment. If XLF can weather all the financial sector earnings due out tomorrow, I suspect that a bottom will be in for the financial sector.

CBOE Launches "Oil VIX" (OVX)

2008-07-15T07:58:00.000-07:00

Today the CBOE launched an "Oil VIX" (OVX) based on options on the USO crude oil ETF.

According to the CBOE press release, the exchange is in the process of expanding their volatility index product line into commodities and foreign currencies.

I think this is an exciting development that just happens to fit nicely with several chapters in my upcoming book.

I'll have a lot more to say about the OVX and other CBOE volatility products going forward.

Bernanke and Moody's May Have Accelerated Formation of Bottom

2008-07-15T07:09:00.000-07:00

As I type this, the Dow Jones Industrial Average is down about 200 and the VIX has spiked to 30.79, largely as a result of prepared remarks by Ben Bernanke and a downgrade by Moody's of Fannie Mae (FNM) and Freddie Mac (FRE).

As a result of these two developments, some capitulation activity has been accelerated and the likelihood of an intermediate bottom forming today, tomorrow or Thursday is now over 95%.

Volatility and Sentiment Tidbits…and Today Doesn’t Matter

2008-07-14T11:34:00.000-07:00

Some semi-random thoughts inspired by today’s market action:

The VIX:VXV ratio spiked up to 1.12 at 1:12 p.m. EDT (I’m not superstitious, but that’s an interesting bullish signal)
The underappreciated VXN (volatility index for the NDX or NASDAQ-100) spiked over 34 on Friday and made it as high as 33.76 earlier today. That’s not enough to satisfy the “VIX must spike over 30!” purists, but it is an interesting data point, particularly because the VXN and NDX excludes financials
My VIX algebra says that two medium to large VIX spikes on Friday and today do not equal one large capitulation-friendly VIX spike
The CBOE equity put to call ratio – an excellent market timing indicator – is looking bullish

When all is said and done, I don’t think we can have a serious market rally until the tone of the news flow changes, regardless of market technicals and sentiment data. There must be several bullish macroeconomic and/or fundamental data points which collectively give the bulls a reason not to be so skittish. At a minimum, the markets need to navigate the PPI, CPI, industrial production and capacity utilization data due out tomorrow and Wednesday, then weather the flood of earnings reports (with strong representation from some key financial institutions) on Thursday. Even then, there is the Citigroup (C) earnings story on Friday morning.

Whatever happens to the rest of today’s session, the balance of the week will tell the story.

VIX:VXV Ratio Now at 1.10

2008-07-11T09:29:00.000-07:00

The VIX:VXV ratio has just hit the 1.10 level, which I consider to be a strong buy signal.

For the record, the 1.10 reading was reached at 12:28 p.m. EDT, with the VIX at a level of 28.97 (+13.21%)

Implied Volatility at Fannie Mae (FNM) Tops 400

2008-07-11T07:36:00.000-07:00

Not that this should surprise anyone who has been following this story, but it is an impressive number nonetheless and deserves to be captured here for archival purposes at the very least.

VIX:VXV Ratio Tops 1.08, Signals a Buy

2008-07-11T07:31:00.000-07:00

For those out there who have become fans of the VIX:VXV ratio, just a quick heads up that it just moved over 1.08 to generate the first buy signal since mid-March.

For more on the VIX:VXV ratio, click on the link above or the label below.

Implied Volatility of Top Three SPX Sectors

2008-07-10T08:23:00.000-07:00

Yesterday, in The Impact of Financial and Energy Stocks on the VIX, I talked about the low (and sometimes negative) correlation between the SPX and some of the sectors represented in the index.

Today I am posting a graphic of the top three sectors (per the Sector SPDR breakdown) in the SPX: technology (XLK: 19.7%); energy (XLE: 15.3%); and financials (XLF: 14.2%). The graph shows a strong correlation between the implied volatility of the SPDR sectors. This should come as no surprise.

Some readers have expressed confusion about correlations between prices and implied volatility. The key takeaway is that SPX implied volatility is not cumulative. The net implied volatility of the SPX is a function of not just the implied volatility of the components or sectors, but also of the directional pull. Let’s take a simplified example. Consider a hypothetical situation in which XLK and XLE are both 18% of the total SPX and both have an implied volatility of 40. If both are perfectly correlated, then 36% of the SPX should have an implied volatility of 40. If, on the other hand, XLK has a correlation of +1.0 (100% positive correlation) and XLE has a correlation of -1.0 (100% negative correlation), then the two sectors cancel each other out and the ‘net implied volatility’ for this 36% slice of the SPX is an even zero.

As a general rule, the higher the correlation among the sectors and individual stocks, the higher the net implied volatility. High implied volatility combined with low or negative correlations generally translates into lower net implied volatility.

For some more detailed individual research into this topic, I recommend Don Fishback’s Index Implied Volatility Is Based on Correlation and Time – It’s Not Just Magnitude!

The Impact of Financials and Energy Stocks on the VIX

2008-07-09T06:58:00.000-07:00

The rapidly changing fortunes of financial institutions and energy stocks have been widely chronicled – so much so that there is no need to repeat the details here.

The implications of the shift away from financials and toward energy touch upon several issues that I have not yet seen addressed in the media. One of the obvious ones is the composition of various stock indices. In the S&P 500 index (SPX), for instance, just from 2007 to the present, financials have dropped from 22% of the index to 14% of the index, while energy stocks have surged from 10% to 16% of the index. The change is particularly important when one considers that financials (XLF) have historically been highly correlated to the SPX (0.91 over the course of the past year), while the energy sector (XLE) has typically had the lowest correlation to the SPX (-0.28 for the past year).

Consider that in the past year, the index has been tilting away from financials and toward energy stocks, essentially swapping a positive 0.91 correlation for a negative 0.28 correlation. Given that the VIX is based on SPX options, there can be little wonder why the VIX has been moving more lethargically as of late: an increasingly dominant sector – the energy group – is pulling in the opposite direction of the other sectors. The result? Sector gridlock is dampening the movements of the SPX and of SPX derivatives, like the VIX.

[Hat tip to Adam at Daily Options Report and Don at Don Fishback's Market Update for jump starting some of my thinking on this subject.]

Headwinds Index: Financials (XLF) vs. Oil (USO)

2008-07-08T06:34:00.000-07:00

Two numbers have been moving consistently in the wrong direction for the US economy during the past few months: oil prices and bank loan portfolio quality.

The chart below, which reflects a ratio of the valuation of financials (XLF) to crude oil prices (per the USO ETF), neatly captures the recent double threat posed by trends in these two sectors.

You can make an excellent argument that a bottom will not be in until at least one of the two trends, probably both, have reversed. My thinking is that the XLF:USO ratio chart is an excellent tool to monitor those two trends and pinpoint the turnaround. At the very least, I consider the XLF:USO ratio to be a reasonable proxy for two of the major headwinds that the markets are grappling with.

VIX:VXV Ratio Approaches Bullish Territory

2008-07-07T10:16:00.000-07:00

One of the better indicators over the past 7 ½ months has been the VIX:VXV ratio, which, as the chart below shows, has been quite accurate in calling tops and bottoms in the market following the VXV launch back in November 2007 and I whose application I pioneered soon thereafter. I mention this because the last time the VIX:VXV ratio gave a clear bullish signal was at the mid-March bottom; and the ratio is coming close to another VIX:VXV bullish signal today.

For more information on the VIX:VXV ratio, try The VIX, VXV and Volatility Expectations. For more information about the VXV, try Thinking About the VXV.

Most Read Posts of 2008 (as of 6/30/08)

2008-07-06T11:01:00.000-07:00

I recently received a request to supplement my Most Read Posts of 2007 compilation with something more up to date.

My original intention was to wait until the end of the year to highlight the top posts of 2008, but since this year has already been a historic roller coaster ride of sorts, I see no reason not to take a snapshot at the halfway mark.

So, without further ado, the top 25 most read posts of 2008 (through June 30^th):

On Measuring Volatility

2008-07-03T08:58:00.000-07:00

Mike at HEDGEfolios.com has a good post up today with the title of Measuring Volatility. He touches a lot of bases, but it all starts with the following statement:

“When it comes to measuring or sensing stock market volatility, I do not follow the VIX.”

Now I may have invented that silly tagline, “Your one stop VIX-centric view of the universe,” but I am the first to argue that a defaultist mind set is the wrong way to approach the investment landscape. If you follow the same indicators with the same default settings as everyone else, you are setting yourself up not just to follow the crowd, but to be a half step behind it. In order beat the crowd, what is needed is a variant perception.

Back to HEDGEfolios for a moment:

“The key element of volatility using traditional methods like the VIX rests on the reversal at extremes in a contrarian indication such as buying when the VIX exceeds 30. This is a very dangerous concept and I do not advocate for its use… I never liked that approach so I do my own thing and look at each stock, the turnover in each and how the composite of all signal changes indicates the market volatility.”

Volatility is a wide-ranging concept. It can be defined, measured and applied to over 10,000 stocks and ETFs in many different ways. To think that best way to harness information about volatility is to buy when the VIX hits X is ludicrous.

Consider that the concept of volatility can be applied not just to price, but to volume, options prices, market breadth data, etc. Volatility is a characteristic of every slice of the almost infinite flow of data that is associated with the markets.

It’s not just what you measure, it’s how you measure it. Volatility can look forward when it is in the form of a forecast or a derivation, such as implied volatility. When volatility looks backward, the opportunities to get creative are even richer. There is historical volatility, average true range, Bollinger bands, Chaikin volatility, relative volatility, and a variety of ways in which to index volatility.

Go ahead and watch the VIX, but don’t think for a moment that you are going to have an advantage over the thousands of other people who are watching the same indicator. Sure, you might come up with the next great VIX permutation, but you are far more likely to get a leg up on the competition by revisiting some basic questions:

Is volatility worth following?
How can more knowledge about volatility make me a better investor?
Which aspects of volatility should I pay attention to?
How should I measure that type of volatility?
How do I interpret those measurements for maximum ROI?

One of my favorite measures of volatility is the number of buy and sell signals my various systems generate each evening. It’s simple, but effective. And I can be sure that nobody is not going to show up on CNBC tomorrow touting the same approach.

Getting Tougher to Push Financials Lower from Here?

2008-07-02T10:11:00.000-07:00

Halfway through today’s session, my screen is once again filled with red, as the indices look as if they are poised to take a run at yesterday’s lows.

From a sector perspective, the picture is considerably muddier, as two recent laggards, financials (XLF) and consumer discretionary (XLY), are clinging to positive territory as I type this. As I see it, one or the other of these sectors will have to continue to deteriorate if the markets are going to continue lower from current levels.

Given that the financials are already down 53% from their May 2007 highs (see chart below), it is important to keep in mind that the easy money has already been made on the short side. A wide variety of financial sub-sectors (mortgage companies, bond insurers, money center banks, regional banks, investment banks/brokers, etc.) have already made multiple trips to the woodshed – and while some individual issues may still be quite vulnerable going forward, there is a limit to the amount of blood that can be squeezed from a broad-based ETF or index.

Going forward, I suspect the risk/return profile of the financial sector may actually favor the bulls. If the next couple of broad market moves down fail to pull the financials with them, the path of least resistance for the likes of XLF may indeed be up. Keep an eye on this development, because if (and admittedly this is a very large “if”) the financials are done falling, then the markets are likely to be ready to put in a bottom too.

Fearogram Maps Recent VIX Complacency

2008-07-01T09:21:00.000-07:00

There has been so much talk about complacency in the VIX that I thought I should dust off the old fearogram and see just how complacent the VIX has been as of late.

For those who are new to the concept of the fearogram (a term I hatched last October), it is essentially a chart of the daily change in the VIX vs. the daily change in the SPX. (For more background on the fearogram concept, try previous posts with the fearogram label.)

The chart below plots a best fit diagonal black line which represents a ratio of the daily percentage change in the VIX to the daily percentage change in the SPX for every trading day going back to 1990. Essentially, the larger the distance between individual data points and the fearogram best fit line, the more extreme the level of fear or complacency. For data points above and to the right of the best fit line, the VIX is increasing out of proportion to the drop in the SPX, indicating more fear. For data points below and to the left of the best fit line, the relatively muted reaction of the VIX suggests more complacency. Data points that hug the best fit line are indicative of a VIX that is consistent with typical historical relationships between the VIX and the SPX.

In the chart below, the blue diamonds are plots of individual daily ratios of VIX and SPX percentage changes for each day during the past two weeks. In studying the chart, note that during the past two weeks, the VIX has never once shown more fear than is reflected in the average daily ratio.

Of course, today is looking like it could be the day the tide finally turns.

Portfolio A1 Performance Update: 6/30/08

2008-06-30T22:27:00.000-07:00

Per reader request, what follows is a snapshot of Portfolio A1 for the month ended June 2008.

The chart below shows the equity curve and some summary performance statistics for Portfolio A1 since the equities only (no ETFs or options), long only portfolio was created on February 16, 2007. During the 16 ½ months since inception, Portfolio A1 has posted a cumulative return (exclusive of dividends) of 23.9%, while the benchmark S&P 500 index has declined 12.1%. This adds up to a net performance of +36.0% for the portfolio vs. the benchmark.

The graphic to the right provides some additional performance details for Portfolio A1 vs. the S&P 500 index over a variety of time frames. For the second quarter of 2008, for instance, Portfolio A1 returned 17.6%, while the S&P 500 was down 3.2%

For the record, Portfolio A1’s current holdings include: Mosaic (MOS); TBS International (TBSI); PetroQuest (PQ); DreamWorks Animation (DWA); and Homex Development Corp (HXM). Portfolio A1 also shares some common ancestry and has a stock ranking system that is similar to the VIX and More Focus Aggressive Trader model portfolio – one of the four model portfolios that I update transaction by transaction for the VIX and More subscriber newsletter.

Finally, I would be remiss in not reiterating that Portfolio A1 was created with tools developed by Portfolio123.com and is managed via Portfolio123.com’s tool set. For more information on Portfolio123.com, please refer to an earlier post on the subject, Portfolio123.com: The Engine Behind Portfolio A1.