How market reach a bottom
Sunday, August 28, 2011
Good article about using RSI 40/60 and momentum to go long/short
TraderJamie introduced this method: I guess this is a day trade strategy with momentum play.
http://traderjamie.blogspot.com/2011/08/technical-picture-symmetrical-triangle.html
I look for the RSI to move quickly from the lower range to above 60 then dip under. When it crosses back above 60, if momentum is above 0, I go long. Negative divergence of the RSI to higher prices signals a short term top and time to take profits. An orderly consolidation such as the symmetrical continuation triangle below, can allow for a second entry.
The same counter-trend setup works after a rally. Look for the RSI to quickly move from higher readings to below 40. If RSI moves back above 40 and crosses below on negative momentum, it sets up a short. It's important that the inital move in the RSI is quite fluid as is the move in price, otherwise, it could be signalling a minor move within a larger consolidation pattern, which is fine if you're nimble, but if you're not, stay on the sidelines.
http://traderjamie.blogspot.com/2011/08/technical-picture-symmetrical-triangle.html
I look for the RSI to move quickly from the lower range to above 60 then dip under. When it crosses back above 60, if momentum is above 0, I go long. Negative divergence of the RSI to higher prices signals a short term top and time to take profits. An orderly consolidation such as the symmetrical continuation triangle below, can allow for a second entry.
The same counter-trend setup works after a rally. Look for the RSI to quickly move from higher readings to below 40. If RSI moves back above 40 and crosses below on negative momentum, it sets up a short. It's important that the inital move in the RSI is quite fluid as is the move in price, otherwise, it could be signalling a minor move within a larger consolidation pattern, which is fine if you're nimble, but if you're not, stay on the sidelines.
Saturday, August 27, 2011
Thursday, August 25, 2011
How Much Did Warren Buffett Pay For BofA Anyway? (zz)
There is a good spreadsheet to tell us how much roughly Buffett pay for BOA. Quite a good fundamental lessons from this article.
http://dealbreaker.com/2011/08/how-much-did-warren-buffett-pay-for-bofa-anyway/
There are those who will tell you that the equity value of a big bank is an imponderable mystery. Which is true. And there are those who will tell you that Bank of America’s sale of preferred shares plus warrants to Buffett will “keep BofA from a more-dilutive capital raise.” Which is probably true as a matter of, like, EPS and share issuance and stuff. And there are those who point out that Buffett did not get a 2008-level deal with a double-digit coupon and otherwise face-ripping terms. Which is also true.
Still, he’s Warren Buffett. He got a deal. And imponderable mysteries (and meaningless EPS numbers) aside, you could if you wanted to calculate the value per common share that Buffett’s investment implies for BAC. This is neither rocket science nor particularly scientific at all and I suggest it only because, in my former life, I often encountered people who thought it was a sensible thing to look at and ponder in their hearts.
So here is a Google Docs spreadsheet that does it. Short answer is about $5.28, which is just a bit less than the $7.14 strike price on Buffett’s warrants, or the high-$7s area where it’s currently trading.
The thinking here is as follows, based on the publicly announced terms of the deal:
1. You can value the preferred pretty easily. This is not entirely true! But pretend it is. The simple way to do this is to value the preferred as a perpetuity with a 6% coupon discounted at the going yield (as of yesterday) for BAC’s traded perpetual preferreds, which were at around 8.25% – 8.50% in round numbers. You could get worried about differing call dates etc. and do something more complicated, like pretend it’s a term instrument and will be called at 105% in X years – which made sense for some of the TARP-era 10% prefs – but the perpetuity model is easier and probably makes good sense here. The spreadsheet gives you the option but, y’know, avoid it.
2. Once you’ve done that you subtract the preferred value from Buffett’s $5bn investment to get the value of his warrants. You divide that number by 700 million – the number of warrants – to get the value per warrant.
3. You can plug that in to a Black-Scholes calculator where you know things like the strike price (around $7.14), maturity (10 years), etc. The implied volatility on a 10-year BAC option is somewhat mysterious but you might think about things like the fact that long-term S&P vol has been in the low 20s, financials are more volatile than the market broadly, and BAC’s short-dated vol has been in the high 30s for the last six months and is like six zillion today. And then throw in a 35% vol for the hell of it. Or don’t – bold blue inputs here are changeable to your heart’s content.
4. So the thing you’re trying to figure out is the implied stock price. You could use yesterday’s close as the spot price – $6.99, in which case Buffett got about $5.9 billion of stuff for a $5 billion investment, which probably makes sense as a matter of what kind of deal he can negotiate (Column G does the math). Or you could use the current price as spot – call it $7.82 – and then he’s at more like $6.3 billion (Column H). So he made like $450mm of “theoretical” value today.
But you want to solve for the implied spot, meaning the BAC stock price at which Buffett paid $5bn to get $5bn of paper. And that’s the goalseek in C30-C32 (and Column I). And on our assumptions that’s an implied price of around $5.28.
Is that airtight? No. Does it “prove” that BAC is “worth” five bucks and change? No. Is it directionally suggestive of the kind of discount Buffett bought BAC at? Probably.
http://dealbreaker.com/2011/08/how-much-did-warren-buffett-pay-for-bofa-anyway/
There are those who will tell you that the equity value of a big bank is an imponderable mystery. Which is true. And there are those who will tell you that Bank of America’s sale of preferred shares plus warrants to Buffett will “keep BofA from a more-dilutive capital raise.” Which is probably true as a matter of, like, EPS and share issuance and stuff. And there are those who point out that Buffett did not get a 2008-level deal with a double-digit coupon and otherwise face-ripping terms. Which is also true.
Still, he’s Warren Buffett. He got a deal. And imponderable mysteries (and meaningless EPS numbers) aside, you could if you wanted to calculate the value per common share that Buffett’s investment implies for BAC. This is neither rocket science nor particularly scientific at all and I suggest it only because, in my former life, I often encountered people who thought it was a sensible thing to look at and ponder in their hearts.
So here is a Google Docs spreadsheet that does it. Short answer is about $5.28, which is just a bit less than the $7.14 strike price on Buffett’s warrants, or the high-$7s area where it’s currently trading.
The thinking here is as follows, based on the publicly announced terms of the deal:
1. You can value the preferred pretty easily. This is not entirely true! But pretend it is. The simple way to do this is to value the preferred as a perpetuity with a 6% coupon discounted at the going yield (as of yesterday) for BAC’s traded perpetual preferreds, which were at around 8.25% – 8.50% in round numbers. You could get worried about differing call dates etc. and do something more complicated, like pretend it’s a term instrument and will be called at 105% in X years – which made sense for some of the TARP-era 10% prefs – but the perpetuity model is easier and probably makes good sense here. The spreadsheet gives you the option but, y’know, avoid it.
2. Once you’ve done that you subtract the preferred value from Buffett’s $5bn investment to get the value of his warrants. You divide that number by 700 million – the number of warrants – to get the value per warrant.
3. You can plug that in to a Black-Scholes calculator where you know things like the strike price (around $7.14), maturity (10 years), etc. The implied volatility on a 10-year BAC option is somewhat mysterious but you might think about things like the fact that long-term S&P vol has been in the low 20s, financials are more volatile than the market broadly, and BAC’s short-dated vol has been in the high 30s for the last six months and is like six zillion today. And then throw in a 35% vol for the hell of it. Or don’t – bold blue inputs here are changeable to your heart’s content.
4. So the thing you’re trying to figure out is the implied stock price. You could use yesterday’s close as the spot price – $6.99, in which case Buffett got about $5.9 billion of stuff for a $5 billion investment, which probably makes sense as a matter of what kind of deal he can negotiate (Column G does the math). Or you could use the current price as spot – call it $7.82 – and then he’s at more like $6.3 billion (Column H). So he made like $450mm of “theoretical” value today.
But you want to solve for the implied spot, meaning the BAC stock price at which Buffett paid $5bn to get $5bn of paper. And that’s the goalseek in C30-C32 (and Column I). And on our assumptions that’s an implied price of around $5.28.
Is that airtight? No. Does it “prove” that BAC is “worth” five bucks and change? No. Is it directionally suggestive of the kind of discount Buffett bought BAC at? Probably.
Wednesday, August 24, 2011
VIDEO: Steve Jobs and Bill Gates Together
http://allthingsd.com/20070530/steve-jobs-and-bill-gates-together-part-1-of-7/
going to spend time watching on it.
going to spend time watching on it.
S&P 500 stock correlation
http://www.huffingtonpost.com/2011/08/24/stocks-correlation-sp500_n_935539.html
The average 50-day correlation of S&P 500 members to the index has risen to the highest levels since the market bottomed in 1987.
The so-called correlation coefficient -- in which a reading of 1 means stocks move in perfect tandem with the index -- was 0.84 on Tuesday, measured as a 50-day average.
There's a saying in financial circles that during a crisis, correlations go to 1, as investors dump all sorts of assets.
The average 50-day correlation of S&P 500 members to the index has risen to the highest levels since the market bottomed in 1987.
The so-called correlation coefficient -- in which a reading of 1 means stocks move in perfect tandem with the index -- was 0.84 on Tuesday, measured as a 50-day average.
There's a saying in financial circles that during a crisis, correlations go to 1, as investors dump all sorts of assets.
Quotes
One of the traps many people fall in to is that they become too bearish near bottom and are not mentally ready for start of new bull move. Some continue to short the market when it starts rallying. Some get so convinced of the bearish propaganda that they start believing market is going to go down a lot. That is why you need timing tools which will tell you when the trend has changed.
________________________________________________________________________________
Everyone was so excited about gold few days ago. Now see what happened. That is why think setup rather than hype. The setup idea that works in swing trading is to :
1 find stock with momentum
2 wait for it to pullback or go sideways
3 buy a b/o from that
That is your setup logic. If gold stock meet that then you buy. Don't buy based on someone predicting it will go up.
_________________________________________________________________________________
Think setup not what people feel or say. Setups are:
1 breakouts
2 pullbacks
3 exhaustion
4 pivot
Bear Flag Scan - (XAVGC9C1) and (C1>C2) and (C2>C3)) or ((C>C1) and (C1>C2 or C2>C3 or C3>C4))) and (V
In stockcharts scan, the syntax for bear flag scan is as following:
[type = stock] and [country = us] and [daily sma(20,daily volume) > 40000] and [daily ema(9,daily close) < daily ema(20,daily close)] and [daily close < daily ema(20,daily close)] and [ [daily close > yesterday's daily close] and [yesterday's daily close > 2 days ago daily close] and [2 days ago daily close > 3 days ago daily close] or [[daily close > yesterday's daily close] and [ [yesterday's daily close > 2 days ago daily close] or [2 days ago daily close > 3 days ago daily close] or [3 days ago daily close > 4 days ago daily close] ]]] and [daily volume < yesterday's daily volume] and [yesterday's daily volume < 2 days ago daily volume] and [2 days ago daily volume < 3 days ago daily volume]
http://www.hardrightedge.com/tour/watch.htm
________________________________________________________________________________
Everyone was so excited about gold few days ago. Now see what happened. That is why think setup rather than hype. The setup idea that works in swing trading is to :
1 find stock with momentum
2 wait for it to pullback or go sideways
3 buy a b/o from that
That is your setup logic. If gold stock meet that then you buy. Don't buy based on someone predicting it will go up.
_________________________________________________________________________________
Think setup not what people feel or say. Setups are:
1 breakouts
2 pullbacks
3 exhaustion
4 pivot
Bear Flag Scan - (XAVGC9
In stockcharts scan, the syntax for bear flag scan is as following:
[type = stock] and [country = us] and [daily sma(20,daily volume) > 40000] and [daily ema(9,daily close) < daily ema(20,daily close)] and [daily close < daily ema(20,daily close)] and [ [daily close > yesterday's daily close] and [yesterday's daily close > 2 days ago daily close] and [2 days ago daily close > 3 days ago daily close] or [[daily close > yesterday's daily close] and [ [yesterday's daily close > 2 days ago daily close] or [2 days ago daily close > 3 days ago daily close] or [3 days ago daily close > 4 days ago daily close] ]]] and [daily volume < yesterday's daily volume] and [yesterday's daily volume < 2 days ago daily volume] and [2 days ago daily volume < 3 days ago daily volume]
http://www.hardrightedge.com/tour/watch.htm
Tuesday, August 23, 2011
Market Leaders; a Double Edge Sword - Part 1 by Mark Minervini (zz)
http://markminerviniblog.blogspot.com/2011/08/market-leaders-are-double-edge-sword.html
Market Leaders; a Double Edge Sword - Part 1
Just as the leaders lead on the upside, they also lead on the downside. Why? After an extended rally or bull market, the market’s true leaders have already made their big moves. The smart money that moved into these stocks ahead of the curve will move out swiftly at the first hint of slowing slow. When the leading names in leading industry groups start to falter after an extended market run, this is a danger signal that should heighten your attention to the more specific signs of market trouble or possible trouble in a particular sector or industry group.
Most stocks experience a relatively severe decline in price after a phenomenal advance has run its course. This is normally due to profit-taking and the anticipation of slower growth ahead. A weakening general market is often the cause for subsequent price declines.
There will come a point when leading stocks stop making new highs, start to churn, or, even worse, buckle and reverse direction. This often happens before the overall market tops and gets into serious trouble. For example, in mid-1999, I started to point out the divergences and negative signals that specific stocks were flashing. At the time, some of the market’s key leaders were starting to top out, while the indexes continued to accelerate higher. For months I saw evidence that the ice was melting beneath the market, based on the action of leading stocks. Institutional clients kept asking me if I was sure about my opinion, because while the divergences were clear, the market averages kept powering upward. I was asked repeatedly, are you being too cautious?
F5 Networks - Stock Tops Before Market
CLICK ON IMAGE TO ENLARGE
Bull markets sometimes roll over gradually whereas bottoms often end with a sudden sell-off, followed by a strong rally. As the leaders start to buckle, the indexes can move up farther or start to churn, moving sideways. That's because cash stays in the market and rotates into laggard stocks. The indexes hold up or even track higher on the backs of the stragglers. Watch out! When this happens the end is near and the really great opportunities may have already passed.
Most investors miss these subtle signs, mainly because they become conditioned by the market’s previous persistence upward during the bullish phases. What’s the big deal if a few stocks start to crack, they tell themselves, as long as the Dow keeps heading higher; Right?
A bull market is always dominated by at least one sector and several sub-sectors. Within the top sectors leading a new bull market, the relatively few leading names that dominate the leadership during a bull market eventually attracts the attention of institutional money. The excessive, concentrated buying enthusiasm for those leaders can push their prices far above realistic valuations. As a result, those same issues tend to decline the most during the subsequent bear market. For those investors who hold on to the former leaders for too long, the results can be devastating.
Market Leaders; a Double Edge Sword - Part 1
Just as the leaders lead on the upside, they also lead on the downside. Why? After an extended rally or bull market, the market’s true leaders have already made their big moves. The smart money that moved into these stocks ahead of the curve will move out swiftly at the first hint of slowing slow. When the leading names in leading industry groups start to falter after an extended market run, this is a danger signal that should heighten your attention to the more specific signs of market trouble or possible trouble in a particular sector or industry group.
Most stocks experience a relatively severe decline in price after a phenomenal advance has run its course. This is normally due to profit-taking and the anticipation of slower growth ahead. A weakening general market is often the cause for subsequent price declines.
There will come a point when leading stocks stop making new highs, start to churn, or, even worse, buckle and reverse direction. This often happens before the overall market tops and gets into serious trouble. For example, in mid-1999, I started to point out the divergences and negative signals that specific stocks were flashing. At the time, some of the market’s key leaders were starting to top out, while the indexes continued to accelerate higher. For months I saw evidence that the ice was melting beneath the market, based on the action of leading stocks. Institutional clients kept asking me if I was sure about my opinion, because while the divergences were clear, the market averages kept powering upward. I was asked repeatedly, are you being too cautious?
F5 Networks - Stock Tops Before Market
CLICK ON IMAGE TO ENLARGE
Bull markets sometimes roll over gradually whereas bottoms often end with a sudden sell-off, followed by a strong rally. As the leaders start to buckle, the indexes can move up farther or start to churn, moving sideways. That's because cash stays in the market and rotates into laggard stocks. The indexes hold up or even track higher on the backs of the stragglers. Watch out! When this happens the end is near and the really great opportunities may have already passed.
Most investors miss these subtle signs, mainly because they become conditioned by the market’s previous persistence upward during the bullish phases. What’s the big deal if a few stocks start to crack, they tell themselves, as long as the Dow keeps heading higher; Right?
A bull market is always dominated by at least one sector and several sub-sectors. Within the top sectors leading a new bull market, the relatively few leading names that dominate the leadership during a bull market eventually attracts the attention of institutional money. The excessive, concentrated buying enthusiasm for those leaders can push their prices far above realistic valuations. As a result, those same issues tend to decline the most during the subsequent bear market. For those investors who hold on to the former leaders for too long, the results can be devastating.
Saturday, August 20, 2011
Some option strategies
1. Bull call spread (bull) (vertical spread)
long call at lower strike price, short call at higher striker price.
2. Bear put spread (bear)
long put at higher strike price, short put at lower strike price.
3. Long butterfly (neutral, time erosion helps)
long lower strke call, short two calls at central strike combined with long call at equidistant higher strike price. Options should have same expiration.
Need to pinpoint the strike price at which equity will settle at expiration.
4. short butterfly
bullish on the increasing volatility. It requires the price of the underlying instrument moves in either direction and away from the central strike price chosen in the combination.
5. long condor(neutral, time erosion helps, volatility view decrease)
combine credit put spread and credit call spread using four strike prices. Buy put at lower strike, sell put at higher strike. Sell call at higher strike and buy call at highest strike price. Options should have same expiration.
6. short condor
7. Long straddle ( volatility increase, time erosion hurts)
Direction of the price movement is not important. Need an increase in either volatility or in the move of the price of underlying equity. Long straddle at equity's support or resistance.
Buy same strike call and put with same expiration.
8. short straddle
9. Long strangle ( volatility increase, time erosion hurts)
It is a less costly alternative to the long straddle. Need to have a larger movement in the price of underlying equity to breach the rquired payoff parameters.
buy lower strike put and higher strike call of same expiration
10. Short strangle
11. Ratio call spread (bull)
buy call option. sell multiple call options at higher strike price.
12. Ratio put spread (bear)
13. Collar (neutral/mildly bullish, time erosion helps)
similar to bull call spread.
long equity, long put option at lower strike price and short call option at higher strike price. Options should have same expiration.
14. Reversal
arbitrage opportunity.
15. Conversion.
arbitrage opportunity. Long equity, short call option and long put option with the same strike and expiration.
16. Long calendar spread (volatility decrease, time erosion helps)
short front month call(put), long back month call(put) with the same strike price. Benefit from the time decay of the front month options. Optimal profit occurs when the market price is at the strike price at expiration.
17. short calender spread.
volatility increase in front month, decrease in back month. Optimal profit occurs when the market price move away from the strike price at expiration.
long call at lower strike price, short call at higher striker price.
2. Bear put spread (bear)
long put at higher strike price, short put at lower strike price.
3. Long butterfly (neutral, time erosion helps)
long lower strke call, short two calls at central strike combined with long call at equidistant higher strike price. Options should have same expiration.
Need to pinpoint the strike price at which equity will settle at expiration.
4. short butterfly
bullish on the increasing volatility. It requires the price of the underlying instrument moves in either direction and away from the central strike price chosen in the combination.
5. long condor(neutral, time erosion helps, volatility view decrease)
combine credit put spread and credit call spread using four strike prices. Buy put at lower strike, sell put at higher strike. Sell call at higher strike and buy call at highest strike price. Options should have same expiration.
6. short condor
7. Long straddle ( volatility increase, time erosion hurts)
Direction of the price movement is not important. Need an increase in either volatility or in the move of the price of underlying equity. Long straddle at equity's support or resistance.
Buy same strike call and put with same expiration.
8. short straddle
9. Long strangle ( volatility increase, time erosion hurts)
It is a less costly alternative to the long straddle. Need to have a larger movement in the price of underlying equity to breach the rquired payoff parameters.
buy lower strike put and higher strike call of same expiration
10. Short strangle
11. Ratio call spread (bull)
buy call option. sell multiple call options at higher strike price.
12. Ratio put spread (bear)
13. Collar (neutral/mildly bullish, time erosion helps)
similar to bull call spread.
long equity, long put option at lower strike price and short call option at higher strike price. Options should have same expiration.
14. Reversal
arbitrage opportunity.
15. Conversion.
arbitrage opportunity. Long equity, short call option and long put option with the same strike and expiration.
16. Long calendar spread (volatility decrease, time erosion helps)
short front month call(put), long back month call(put) with the same strike price. Benefit from the time decay of the front month options. Optimal profit occurs when the market price is at the strike price at expiration.
17. short calender spread.
volatility increase in front month, decrease in back month. Optimal profit occurs when the market price move away from the strike price at expiration.
Point and Figure Charting
Stockcharts have the option to create Point and Figure Charting. The following website is a good one to teach how to read the Point and Figure Charting. It has 6 lesssons with vivid description.
http://67.62.208.70/cgi-bin/foxweb.exe/fwuniv?email=&doc=index.html
Point And Figure Charting Basics from Investopedia
Point & Figure Home Page from stockcharts.com
http://67.62.208.70/cgi-bin/foxweb.exe/fwuniv?email=&doc=index.html
Point And Figure Charting Basics from Investopedia
Point & Figure Home Page from stockcharts.com
Wednesday, August 17, 2011
weekly column on Earnings Trend
Dirk Van Dijk of Zacks writes a weekly column on Earnings Trend (it is free) . That sums up earnings trend the best
http://www.zacks.com/commentary/18549/Is+a+Recession+Priced+In%3F
http://www.zacks.com/commentary/18549/Is+a+Recession+Priced+In%3F
Sunday, August 14, 2011
Implementation of Market Monitor by Timelysetup
Today I implement the market monitor strategy developed by timelysetup. Based on the following chart, we can see there is slight difference from timelysetup's. I think the cause is that Timelysetup is using the longer period for summation than I am doing.
Some observation from the chart:
1. From 01/15/2011 to 02/17/2011, price and indicator are forming the divergence.
2. We are currently at very negative reading. Expect to have some bounce here.
3. Can we have the indicator go above 0 again in the next few months?
4. The indicator can be used for timing 401K entry and exit.
Some observation from the chart:
1. From 01/15/2011 to 02/17/2011, price and indicator are forming the divergence.
2. We are currently at very negative reading. Expect to have some bounce here.
3. Can we have the indicator go above 0 again in the next few months?
4. The indicator can be used for timing 401K entry and exit.
Thinkorswim List of indicator symbols
List of indicator symbols: (All start with $)
ADVA Amex advance issues
ADVN Nyse advanced issues
ADVN/Q Nasdaq advance issues
DECA Amex deline issues
DECN Nyse decline issues
DECN/Q Nasdaq decline issues
DVOA Amex decline volume
DVOL Nyse decline volume
DVOL/Q Nasdaq decline volume
UVOA Amex advance volume
UVOL Nyse advance volume
UVOL/Q Nasdaq advance volume
ADVA Amex advance issues
ADVN Nyse advanced issues
ADVN/Q Nasdaq advance issues
DECA Amex deline issues
DECN Nyse decline issues
DECN/Q Nasdaq decline issues
DVOA Amex decline volume
DVOL Nyse decline volume
DVOL/Q Nasdaq decline volume
UVOA Amex advance volume
UVOL Nyse advance volume
UVOL/Q Nasdaq advance volume
Friday, August 12, 2011
VIX vs. VXX Correlation
VIX vs. VXX Correlation
The VXX is an ETN designed to track VIX futures. Investing in VXX is essentially equivalent to exposure to daily rolling long position in the first and second month VIX futures contracts. An investment represents the implied volatility of the S&P 500 at various points along the volatility forward curve. What is the relationship between VXX and VIX?
Basically, VXX is not meant to track VIX, it is designed to track VIX futures, WHICH IS NOT THE SAME!
Further analysis suggests that historically VXX captures about 50% of the daily move in the VIX (although YTD=85%, most likely due to record high implied correlations), largely explained by mean reversion. Theoretically, the VIX index should outperform during a rally because traders will NOT anticipate the VIX to be higher in 30 days. Therefore, the VXX would underperform and get crushed. The opposite would be true in bear markets.
In summary, to say that VXX is a terrible ETN would be inaccurate, there is no mispricing between the two entities. VXX will perform worse than the VIX under the conditions that the market anticipates lower volatility in the future. Unless you are a futures trader, the best way to hedge may simply be buying SPY puts or put spreads. Looking at the metric from a total return basis, we can see the lack of support
The VXX is an ETN designed to track VIX futures. Investing in VXX is essentially equivalent to exposure to daily rolling long position in the first and second month VIX futures contracts. An investment represents the implied volatility of the S&P 500 at various points along the volatility forward curve. What is the relationship between VXX and VIX?
Basically, VXX is not meant to track VIX, it is designed to track VIX futures, WHICH IS NOT THE SAME!
Further analysis suggests that historically VXX captures about 50% of the daily move in the VIX (although YTD=85%, most likely due to record high implied correlations), largely explained by mean reversion. Theoretically, the VIX index should outperform during a rally because traders will NOT anticipate the VIX to be higher in 30 days. Therefore, the VXX would underperform and get crushed. The opposite would be true in bear markets.
In summary, to say that VXX is a terrible ETN would be inaccurate, there is no mispricing between the two entities. VXX will perform worse than the VIX under the conditions that the market anticipates lower volatility in the future. Unless you are a futures trader, the best way to hedge may simply be buying SPY puts or put spreads. Looking at the metric from a total return basis, we can see the lack of support
Monday, August 8, 2011
Market Breadth Monitor from Stockbee
Today Stockbee has revealed his market breath monitor strategy in his public blog. I guess his strategy has been in the public domain for a while, but this is the first time I see it in his public blog.
How to use market breadth to avoid market crashes
In the above link, stockbee explains detailly his market monitor strategy to track bull/bearish market. It is a very very good article worth reading.
I am using TOS to implement Stockbee's MM to monitor market breadth. I feel by joining to be a stockbee member, it improves my trading philosophy and strategies.
How to use market breadth to avoid market crashes
In the above link, stockbee explains detailly his market monitor strategy to track bull/bearish market. It is a very very good article worth reading.
I am using TOS to implement Stockbee's MM to monitor market breadth. I feel by joining to be a stockbee member, it improves my trading philosophy and strategies.
Quote from Mark Minervini
In a BULL Market you buy oversold.
In a BEAR market you sell overbought.
EVERY bear market starts "oversold".
His blog: http://markminerviniblog.blogspot.com/
In a BEAR market you sell overbought.
EVERY bear market starts "oversold".
His blog: http://markminerviniblog.blogspot.com/
Sunday, August 7, 2011
Saturday, August 6, 2011
VIX Rate of Change More Important Than Its Level
http://www.mcoscillator.com/learning_center/weekly_chart/vix_rate_of_change_more_important_than_its_level
Back in February 2010, I introduced Chart In Focus readers to the 7-day rate of change (ROC) for the VIX. It is a fun little indicator, and offers us a nice simple way to see the VIX in a different form than just looking at what the raw values say.
The math is very simple: We just compare the VIX today with the VIX of 7 trading days ago, and find the percentage difference between those two numbers. It ignores all of the values between, which might seem like we are unnecessarily ignoring important data. But the result does a couple of magical things which make it worth looking at.
The first magical indication is that any reading above around +20% is a pretty good sign of an oversold bottom for stock prices, one that is worthy of a bounce. It does not seem to work the same way when we look at extreme negative readings for this indicator. Remember that the VIX is a fear indicator, and so the sudden development of fear which produces a high reading on the 7ROC is not the same phenomenon as a sudden abandonment of fear. Deeply negative readings for this indicator are usually seen at the kickoff of a strong up move, and not at the end of one.
The other magical insight that this indicator gives us occurs when it passes upward through zero. An upward crossing through zero often (but not always) marks an important top for stock prices. These seem to be better top signals when the upward crossing through zero occurs after a longer period below zero. The red vertical lines highlight some good examples of this sort of indication.
The stock market selloff during May and June 2011 unfolded without any big spikes upward in the VIX, which was confusing for a lot of people. If the market was in a downtrend (they wondered), why was the VIX staying so low? We now have the answer, with the sudden jump upward in the 7ROC indicator to a high of 25.8% on June 16. Fear reaches a climax at the end of a decline, not in the middle of one.
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Back in February 2010, I introduced Chart In Focus readers to the 7-day rate of change (ROC) for the VIX. It is a fun little indicator, and offers us a nice simple way to see the VIX in a different form than just looking at what the raw values say.
The math is very simple: We just compare the VIX today with the VIX of 7 trading days ago, and find the percentage difference between those two numbers. It ignores all of the values between, which might seem like we are unnecessarily ignoring important data. But the result does a couple of magical things which make it worth looking at.
The first magical indication is that any reading above around +20% is a pretty good sign of an oversold bottom for stock prices, one that is worthy of a bounce. It does not seem to work the same way when we look at extreme negative readings for this indicator. Remember that the VIX is a fear indicator, and so the sudden development of fear which produces a high reading on the 7ROC is not the same phenomenon as a sudden abandonment of fear. Deeply negative readings for this indicator are usually seen at the kickoff of a strong up move, and not at the end of one.
The other magical insight that this indicator gives us occurs when it passes upward through zero. An upward crossing through zero often (but not always) marks an important top for stock prices. These seem to be better top signals when the upward crossing through zero occurs after a longer period below zero. The red vertical lines highlight some good examples of this sort of indication.
The stock market selloff during May and June 2011 unfolded without any big spikes upward in the VIX, which was confusing for a lot of people. If the market was in a downtrend (they wondered), why was the VIX staying so low? We now have the answer, with the sudden jump upward in the 7ROC indicator to a high of 25.8% on June 16. Fear reaches a climax at the end of a decline, not in the middle of one.
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