Tuesday, June 26, 2007

VIX and VXN Ratios

In an ongoing quest to see if the VIX and VXN can produce Buy and Sell signals for stocks, I applied TOF Ratio settings to ratios of VIX:SPX and VXN:COMPQ.

[The TOF Ratio is a Buy/Sell indicator that divides the NASDAQ by the CPC, using EMA crossovers to trigger the signals. This indicator was developed by the legendary board poster, The Old Fool. I maintain a live version of it here -- fifth chart down.]

Though not perfect, smoothing the VIX and VXN Ratios with EMA's produces illuminating results.

In terms of indicator clarity, the VIX Ratio is the lesser of the two. In April, the synchronized rise in both the SPX and VIX logically produced EMA's that stayed flat for 7 weeks(!). Once the two became more "rational" and broke apart, the EMA's crossed and gave a Sell signal (red arrow). Note that the Sell is still on.

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The VXN Ratio has behaved more reliably throughout the recent volatility ordeal. It's worth pointing out that, after a clean Buy signal in early April (green arrow), the signal is still on. This is consistent with a NASDAQ that is outperforming the financially-troubled SPX so far in 2007.

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Bill Luby at VIX and More has been exploring the SPX:VIX for some time and has written a series of excellent posts on the subject. In response to our ongoing discussions, here's a link to his latest post on usefulness of the VIX Ratio as a timing tool. The post summarizes the recent history of his inquiry, as well as takes it in far more detailed directions. It's a great primer for first-timers to the subject. Thanks for the great work, Bill.



[The graphic at the beginning of this post refers to a series of audio shows collected by Vic. It's an interesting collection, and "Vic's audio shows" are available as podcasts or mp3 downloads.]

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