Market Volatility Index - clues to sentiment?

[wayneL]

HI

You can do all sorts of things with data if you can get it into Amibroker.

This is the latest thing I've come up with... In the US there is an indicator called VIX, which is a composite of IV's of the options of a range of large stocks. It is something a great many tecnicians take notice over there.

Well I've created an Aussie version OZIV for want of a better name. It is a composite of liquid option IV's across arange of stocks in different sectors.

Google VIX and you'll quickly find the interpretation of ther indicator, but basically it is regarded as a fear indicator... It peaks at market bottoms and bottoms in bull markets.

Looking at OZIV, is steadily trending upwards, with intermediate peaks and troughs reverse correlated to XJO peaks and troughs as you'd expect.

But what about this gradual trend toward higher IV's?

Whadaya think?

 

[brerwallabi]

Never heard of this or taken to much notice but its saying on your pink trend line buy on the dips and sell on the highs???
Can I ask how much data you inported to support the OZ iv chart and what your criteria was to include.

 

[wayneL]

An article on VIX:

http://www.investopedia.com/articles/optioninvestor/03/091003.asp

Brer

If you line up the highs on OZIV, they correspond with the lows on the chart. It seems that when OZIV peaks, it's a buy signal.

 

[sails]

Wayne, if history repeats, then maybe the Oz market is not ready for a decent correction just yet , although we have had some fairly fast corrections each time it has hit the lower trendline. Perhaps the market will make new highs or continue to range trade until complacency causes the indicator to drop to new lows. What do you make of it trending up at the moment?

 

[markrmau]

Seen the SMH link below?

I wonder if it is to do with the current bull run. If the share market starts to stagnate like the US 2000-2005, perhaps our volatility will have a reversion to the mean (which your OZIV seems to be trending towards).

"Vale volatility as stockmarket returns stabilise"

http://www.smh.com.au/news/business...e/2006/03/10/1141701687769.html?page=fullpage

"The fall in Australian equity market volatility was not a slow or subtle change, but rather a sharp and permanent drop in the long-run level," the CommSec report says.

"Before March 2003 weekly returns for Australian equities were mostly contained within a band of +/- [plus or minus] 4 per cent. However, after that time, the dispersion of weekly returns contracted significantly to fall predominantly within a much narrower band of +/- 2 per cent.

"For the two years after March 2003, the invisible bounds of +/- 2 per cent were almost never breached."

 

[bullmarket]

Hi WayneL

another 'fear factor' type indicator that people can look at for comparison purposes is the Advance/Decline Line - which for those new to charting is simply a cumulative total of the difference between the number of rising and falling stocks within an index..eg ASX200 (XJO)....for any given time period (day, week, month or whatever).

The index trend is confirmed when the A/D line and the index are both moving in the same direction. Divergence between the A/D line and the index can give potential 'leading' signals....ie...the A/D line beginning to fall, which means there are more falling stocks than rising stocks, while the index is still rising suggests the index may also turn down soon.

I can't chart the A/D line and so I don't use it.....but I recall seeing in the old Shares mag a while ago now a chart displaying a historical major market index and its A/D line and the signals it generated were reasonably close to reality.

food for thought...

bullmarket

 

[wayneL]

Just to clarify what OZIV is. It is an composite of Option Implied Volatilities as opposed to actual market Statistical Volatility

Above I have added the actual Statistical Volatility of the XJO in red.

Whilst IV broadly tracks SV it sometimes can do a major disconnect. Note the most recent divergence for instance.

To me that said there was a lot of people concerned for there portfolios and were buying puts. Fear was high even if there wasn't much of a retrace. Fear was higher in this little retrace than it was in the much bigger Oct 2005 retrace.

Being an avowed bear, I interpret that as more people expecting a top in the market and perhaps a for savage correction could be due.

That fear has abated to a marked degree at present.

I will report any developments as they happen.

Cheers

 

[chemist]

...
But what about this gradual trend toward higher IV's?

Whadaya think?

Market-makers saving for Easter? Fund managers who can't quite believe their luck buying defensive puts? Taxi drivers and waiters buying speculative calls?


cheers,
chemist