Watch the VIX, *NOT* CNBC

10 Mar 2020

I wanted to port some of my Telegram trading group's observations into a more public and archival format. I've been making observations about the VIX during this recent selloff. Through my years of trading I have found the VIX as an indicator can be a very powerful tool in timing the market and gauging the behavior of the market as a whole.

I will admit, regrettably, that I partook in some dip buying on daily timeframe signals during the last week of February. Later in the week, that Thursday to be precise, a member in our group posted a tl;dr of what the financial media was harping on that day: "CNBC says buy the dip". I got a sinking feeling when I read that; my trades were not going to go well. I never watch or read CNBC myself. I prefer to work in silence plus I've come to see financial media as kneejerk ex post facto commentary at best and consorted misinformation at worst. The tongue in cheek meme is to do the OPPOSITE of whatever the talking heads are saying to do on there. Finding out that I was inadvertently going along with their recommendation changed my outlook immediately. Fortunately with this evaporation of confidence in my trades I was able to make some exits on March 3rd at losses and small profits.

To observe and yield actionable info on a market selloff, rather than listen to CNBC opinions, I go to the VIX. The VIX is a great tool for gauging the FUD (fear, uncertainty, and doubt) in the market. If you go back and do a little correlative research you'll find that major spikes are typically short lived and when they coincide with support levels on the SPY/SPX they can yield some very good dip buying signals. When the VIX spikes it's also a good idea to just sell all your long Options... I can almost guarantee they will never be worth more again with the sweet vega push they received that day.

On Saturday as I was charting the week's turmoil I wrote up an analysis to our group in which I noted,

"The thing that gives me some concern is that instead of it being just a single day/week/month spike... we have two full weeks of sustained volatility illustrated by the bars on the weekly."

I'm using the number of 52.5 on the VIX for reference to what I consider a "big spike". 52.5 is a little more specific than 50 because it's the product of an indicator I use but that's not germane to this post. The character of the 2018 and 2015 selloffs and subsequent spikes in the VIX had a common theme; the spike hit the major level on the VIX but remained just that... a spike. When I say spike I am interpreting the long, tall wick of the candlestick on the Weekly bar. Subsequent candle closes of the weeks that followed lacked real follow through above the level or a thick bullish bar demonstrating more FUD. That was not the case of last week's candlestick. It had some staying power and closed as a bullish candle. This was ominous to me. The best selloff to compare it to, at the risk of being meme-ish, is 2008. That rise and continued period of increased volatility had some solid bars to represent weeks of sustained volatility and FUD.

A lot of factors are contributing to this volatility. Three things, I think, really: death, energy, and elections. Once the media has squeezed every view and click it can out of this [clear and present threat to everyone's mortality] you can expect that factor to fade. How long that will take could be a while. The DNC race has been a snooze fest and rent's due. Also, thanks China! In an otherwise bull market the prospect of cheaper energy would be a bullish signal for all but energy stocks. However, that can take a quarter or two to really get the sector rotation effect going. The extended term fact remains that being an election year there is going to be a lot of generalized uncertainty that will ebb and flow with the way the media reports on the national sport of politics. The VIX is mean reverting so in time it will certainly revert; albeit I believe higher through the year than we've seen in a while.

TL;DR: Watch the VIX weekly bars for hints that this selloff is abating.