One of the primary reasons I started Thrasher Analytics was to have way to discuss my research on volatility and share several of the tools I’ve developed and use regularly to analyze financial markets. After winning the Charles H. Dow Award in 2017 for my paper, Forecasting a Volatility Tsunami, I began formulating a way to use the research from the paper into a systematic approach to evaluate the volatility market. This led to the creation of the Thrasher Analytics Volatility Risk Trigger (VRT), a tool I provide an update to in each of the letters I send to subscribers. While I’ve been publishing the letter for nearly a year and half, I haven’t publicly discussed the type of analysis and tools that Thrasher Analytics subscribers have grown accustom to seeing (I guess I’m a better analyst than salesman…oh well). With the recent spike in volatility, the VIX has re-entered the conversation, so I think now is a great time to share my VRT tool.
The Volatility Risk Trigger (VRT) is composed of several different methods of analysis I’ve used over the years to craft my opinion on the volatility market. The foundation of the indicator rests with a more nuanced approach than what I discussed in my research paper. In the paper I used a 20-period standard deviation to measure volatility dispersion. While this was a solid method for looking at compression in the VIX, I’ve found a better approach that’s, let’s say, adjacent to the basic standard deviation tool, that gives more accurate readings with a little less noise. Along with volatility compression, there are other methods of technical analysis, statistics, and volatility futures curve analysis that gets incorporated into the final output. It’s proprietary, so let’s just leave it at that.
Once the data is thrown into the pot, a numerical value is produced, the green bars on the chart below show when the VRT signals a heighten risk of volatility moving higher. By no means is the VRT perfect, nor should it be. My end goal with its creation was to have a formalized, systematic, way to see what different data was telling me about volatility and how they worked in concert with one another.
My purpose with Thrasher Analytics and the VRT is not to provide trade signals. Instead, I provide insight. I provide (what I believe is) a unique approach to the financial market with a focus on risk management, volatility, U.S. equities, and whatever else I feel is noteworthy to share with those that chose to listen (read).
In recent weeks I’ve discussed my belief that volatility had bottomed, I spoke about it on TD Ameritade Network, as well as on social media. This opinion stemmed from what the VRT was signaling, as well as a whole host of other pieces of data that I fortunately have at my disposal in my arsenal of analysis.
An example of using other forms of volatility analysis was in my guest blog post for Josh Brown, Is a Volatility Tsunami Imminent?, which was just before the VIX went from 13 to 20, and a move in volatility that the VRT did not ‘catch.’ Which shows the importance of keeping an open mind and evaluating the market, in this case, volatility, from different angles. I also wrote about the risk of a spike higher in volatility just before the Q4 sell-off on August 6th. A large part of that conclusion was a result of what the VRT was signaling and spot VIX bottomed two days later before a slow grind higher until the dam broke in October sending the VIX to 36.
So how do I use the VRT? I use it as one piece (an important piece) of the puzzle in determining my market bias and the level of risk-taking I chose to take on. I’m very much of the ‘weight of the evidence’ type of analyst. Most recently the VRT was warning of a move in volatility, breadth was breaking down, risk-taking was negatively diverging, among other market developments that were pointing to the heightened potential of the market rolling over. At that point, what’s left was for price to respond, as it began to do so last week.
The VRT does not identify every spike in volatility, asking it to would be impractical, but it’s a tool I’ve grown to rely on and am happy to have the opportunity to share and discuss it with many other forms of commentary and analysis at Thrasher Analytics. If you’d like to learn more please visit www.thrasheranalytics.com
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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.
