Month: June 2017

What I’m Seeing That Has Me Concerned About the Volatility Index

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I’ve had a great response to my Dow Award paper, Forecasting a Volatility Tsunami, with it being downloaded over 3,000 times since April. I really appreciate the support and the positive feedback I’ve received so far. Last week I had the opportunity to do a webcast with the Market Technicians Association, going into much greater detail about the importance of risk management and shedding some more light on the topic of the paper – low levels of dispersion within the VIX.

What I’m seeing today
As of June 16th (last Friday), the dispersion within the Volatility Index (VIX) (i.e. daily gyrations in in the index) has fallen below the threshold I highlighted in my paper. As I mentioned in my webcast and in the paper itself, I do not believe this ‘trigger’ alone is not enough to generate a final conclusion on the potential direction of the VIX and that in my own research I combine it with several other pieces of data. For example, low levels of dispersion in the Volatility Index is similar to clouds forming in the sky that often precedes rain storms, similar to how low dispersion in the VIX often precedes spikes higher. Just like being able to have dark clouds in the sky without rain, we’ve had periods of time where dispersion has been low for the VIX without it being followed by a spike higher. This is why we must continue our analysis in looking at other pieces of data for confirmation.

While last Friday sent the standard deviation (which is how I chose to measures dispersion) for the VIX to a very low-level, paired with some over factors I follow, has sent up a yellow flag for volatility in my opinion. Below is chart of the VIX with previous instances of what I’m seeing taking place right now. Since 2012 we’ve had this type of trigger occur before several intermediate and large swings within the VIX Index as well as at the end of 2010.  Most recently we saw three occurrences in August of last year before the Volatility Index rose over 70% and major U.S. indices weakened for several weeks.

Seasonality
I find it extremely interesting that this is occurring near the end of June, as based on seasonality, that has been when the Volatility Index has historically bottomed out. Thanks to Callum Thomas for the below chart, which he included in his weekly ‘chart storm’ over the weekend, showing the seasonal patterns for the S&P 500 and the VIX Index since 1990.

This post is not meant to act as a recommendation to buy or sell securities but to show an example of how I have incorporated volatility dispersion within my own research. We’ll see what the VIX does in the coming weeks.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.

What’s In A Name?

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“What’s in a name? That which we call a rose
By any other name would smell as sweet.”

Romeo and Juliet

One of my goals for 2017 was to read more. While I’m nowhere close to the Patrick O’Shaughnessy-level of 100+ books a year (Patrick’s book club is a great place to find new titles to read by the way), I am trucking along with my reading list and I’m currently in the middle of reading Pre-Suasion by Robert Cialdini. So far the book has been excellent and is one of my favorite books I’ve read so far this year. While not a finance-related book, there’s one section that stood out that is trading related and helped reinforce something I’ve believed for quite a while.

That is, that many make trading and the evaluation of stocks much more difficult than it truly needs to be. Hours are spent building complex spreadsheets, forecasting cash flows, counting cars in parking lots of retailers, analyzing changes in tone of a CEO during a media interview, etc. Meanwhile, (it’s of my belief that) the market rises and falls on the simple shift of human emotion and psychology which drives supply and demand for a stock. 

That’s where Mr. Cialdini comes in.

Below is a page of Pre-Suasion from a chapter in which Cialdini discusses the idea that people prefer topics and names to be as easy as possible to perform or say. For example, he cites a study that was looked at the names of lawyers and found that those with the hardest names to pronounce were less likely to advance up the ladder of their respective law firms. He also discussed the stock market and the performance of stocks with easy to pronounce names and ticker symbols. 

Seriously! From 1990 through 2004, stocks that had easier to pronounce names outperformed those with unpronounceable names. Now obviously what’s considered easy can vary by the eye mouth of the beholder. But this boils down to the notion that people are drawn to things that are simple – even when it comes to deciding where to invest the trillions of dollars that make up the U.S. financial market.


This is unlike to persuade many of those involved in our field from continuing to expand their spreadsheets with costs of goods sold and revenue projections; nor should it as there is likely value that can be derived from that practice. But it’s important to not lose sight of the idea that at the end of the day, supply and demand within the stock market is largely driven by human emotion. Well what about the HFT traders and all the algos? Sorry to disappoint you but those algorithms were originally written by humans too!

Einstein said “Make things as simple as possible, but not simpler” and he was right. I believe that’s why the concept of long-term trend following has been so effective for so many years. While being one of the simplest ideas of trading (but one of the toughest for investors to stick to), almost binary in its genesis. In fact, AQR showed an example of positive performance of trend following going back to 1880.

This isn’t a post arguing that trend following is superior over other methods or that discounting cash flow is a waste of effort. But to show the simplicity of human desire for the easiest and simplifed solutions, even when it comes to stock selection. At the end of the day basic emotion reins supreme in the search for the easiest route to decision making.

Source: Pre-Suasion: A Revolutionary Way to Influence and Persuade by Robert Cialdini

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.

What’s You’re Biggest Regret?

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Dr. Travis Bradberry recently shared an article he wrote on LinkedIn titled, “Five Choices You Will Regret Forever.” With a title like that, it’s hard not to click. I’m a sucker for good clickbait. I had a personal connection to each of the five choices  Bradberry lists (I included them below). Our lives are full of decisions, some mundane others live-changing, but all are important.

I recently returned from an amazing trip to Italy with my wife. We visited six wineries, saw some breathtaking historical art and monuments, learned more than my brain could hold on to, all while eating some amazing food. While I’ll have memories from the trip that (I hope) last a lifetime – one of the biggest takeaways was the need to experience more of life. In my final days, as Bradberry’s article discusses, I want to limit the number of regrets I have. I am not naive in thinking there won’t be any, but at the age of 30 I’m still young enough to keep that list as short as possible.

Anyway, I thought Bradberry’s list of five regrets is well worth sharing and so here the are (in abbreviated form with a link at the bottom of this post to the full article):

Bronnie Ware spent her career as a palliative care nurse, working exclusively with people who were 3 to 12 months from death. She made a habit of asking them about their greatest regrets, and she heard the same five regrets time and time again. By studying these regrets, you can make certain that you make good choices and don’t fall victim to them yourself.

They wish they hadn’t made decisions based on what other people think. When you make your decisions based on other people’s opinions, two things tend to happen:

  1. You make a poor career choice: There are too many people out there who studied for a degree they regret or even spent their lives pursuing a career they regret. Whether you’re seeking parental approval or pursuing pay and prestige over passion, making a poor career choice is a decision that will live with you forever.
  2. You fail to uphold your morals: When you get too caught up in what your boss thinks of you, how much money you think your spouse needs to be happy, or how bad you will look if you fail, you are at high risk of violating your own morals. Your intense desire to make yourself look good compromises your ability to stay true to yourself and, ultimately, to feel good.

They wish they hadn’t worked so hard. Working hard is a great way to impact the world, to learn, to grow, to feel accomplished, and sometimes even to find happiness, but it becomes a problem when you do so at the expense of the people closest to you. Ironically, we often work hard to make money for the people we care about without realizing that they value our company more than money.

They wish they had expressed their feelings. We’re taught as children that emotions are dangerous and that they must be bottled up and controlled. This usually works at first, but boxing up your feelings causes them to grow until they erupt. The best thing you can do is to put your feelings directly on the table. Though it’s painful to initiate, it forces you to be honest and transparent.

They wish they had stayed in touch with their friends. When you get caught up in your weekly routine, it’s easy to lose sight of how important people are to you, especially those you have to make time for. Relationships with old friends are among the first things to fall off the table when we’re busy. This is unfortunate because spending time with friends is a major stress buster. Close friends bring you energy, fresh perspectives, and a sense of belonging, in a way that no one else can.

They wish they had let themselves be happy. When your life is about to end, all the difficulties you’ve faced suddenly become trivial compared to the good times. This is because you realize that, more often than not, suffering is a choice. Unfortunately, most people realize this far too late. Although we all inevitably experience pain, how we react to our pain is completely under our control, as is our ability to experience joy. Learning to laugh, smile, and be happy (especially when stressed) is a challenge at times, but it’s one that’s worth every ounce of effort.

Any of those stick out to you? I’m sure at least one does if you are honest with yourself. While this blog’s focus is on technical analysis and the financial markets I think it’s important to recognize there’s a world beyond the 500 S&P stocks. My passion is trading and it’s something I believe I’m good at. But it’s important to not lose focus on other aspects of life and making sure the list of  regrets is kept as small as possible.

Source: Five Choices You Will Regret Forever (LinkedIn)

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.