Posts Tagged ‘S&P500’

Forecasting the S&P500 using the VIX

Forecasting the S&P500 using the VIX

Courtesy of Rohan at Data Diary 

McClellan Financial Publications had an interesting analysis last week (here) that looked at “Tracking the VIX response to Price Moves” in the S&P500. A key conclusion of the analysis was that divergences between the two indexes can signal turning points in the S&P500.

The concept seemed a good one – worthy of further investigation.

However, rather than asking how the VIX responds to changes in the S&P500, we turned it around and asked how does the VIX anticipate changes in the S&P500. Perhaps it’s the same question – as who knows which leads which. In any event, it seemed easier to understand a model that mapped the S&P500 as implied by movements in the VIX.

So following are the charts of the actual S&P500 and that implied by movements in the VIX starting from 1Oct09:

Our results are broadly similar.  Three key divergences between the VIX derived S&P500 and the actual price were identified that did indeed precede changes in price direction. At price extremes, there arose a disconnect between the behaviour of option traders and the broader equity market.

Most unhelpfully, the seeming catalyst for McClennan’s article – that we may currently be witnessing another divergence developing was not really confirmed. Though it’d be fair to conclude that the derived S&P500 chart has all the hallmarks of a market undergoing a topping process. We’ll watch this indicator with interest to see how things develop from here.

Epilogue:

Note that correlation changes over time and, not unsurprisingly, falls the longer the period under consideration.  So that the correlation is ~74% for the period 2004 to today, rising to 79% from Jan08, and is 85% for the last year. As with most time series analysis, the start date will have an impact on results.

In backtesting though the analysis retained its value. For example, there was a significant divergence between the VIX derived S&P500 and the actual S&P500 index around the March 2009 lows. The longer term data set is as follows- note the relative performance through 2007:

 


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CHART OF THE DAY: REVISITING THE MARCH LOWS?

If history repeats, keep this chart in mind.

CHART OF THE DAY: REVISITING THE MARCH LOWS?

Courtesy of The Pragmatic Capitalist

According to Bloomberg and Jim Reid, we’re likely to see much lower valuations (and stock prices) at some point in the next few years:

June 22 (Bloomberg) — U.S. and European stocks are destined to fall below March’s lows if bear-market history is any guide, according to Jim Reid, a strategist at Deutsche Bank AG.

Share prices tend to hit bottom “at extremely cheap levels” relative to earnings during so-called secular bear markets, Reid wrote five days ago in his first equity strategy report. Secular bears consist of multiple rallies and declines, with each slump producing lower valuations than the prior one.

The CHART OF THE DAY shows the Standard & Poor’s 500 Index’s price-earnings ratio since 1900, based on data compiled by Yale University’s Robert Shiller and cited in Reid’s report.

stocks666

Shiller calculated the P/E ratio at 6.6 in September 1982, just before the 1980s bull market started. The gauge sank to less than six in the depths of the Great Depression and at the beginning of the 1920s. This year, it has stayed above 13.

“History tells us that at some point in the next decade there will be much more stressed valuations than today and a once-in-a-generation buying opportunity,” wrote Reid, who previously focused on credit-market strategy.

Even “a large rally” later this year and into 2010 may not be enough to prevent this scenario from unfolding, he added. The S&P 500 has climbed as much as 40 percent from its March 9 lows. Reid’s European benchmark, a local-currency version of the MSCI Europe Index, has risen as much as 33 percent.


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Phil's Favorites

When will there be a coronavirus vaccine? 5 questions answered

Reminder: We are available to chat with Members, comments are found below each post.

 

When will there be a coronavirus vaccine? 5 questions answered

A security guard wears a mask as she keeps watch at arriving passengers at Manila’s international airport in the Philippines on Jan. 23, 2020, as part of efforts to contain the coronavirus. Aaron Favila/AP Photo

Courtesy of Aubree Gordon, University of Michigan and Florian Krammer, ...



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Biotech

When will there be a coronavirus vaccine? 5 questions answered

Reminder: We are available to chat with Members, comments are found below each post.

 

When will there be a coronavirus vaccine? 5 questions answered

A security guard wears a mask as she keeps watch at arriving passengers at Manila’s international airport in the Philippines on Jan. 23, 2020, as part of efforts to contain the coronavirus. Aaron Favila/AP Photo

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JPMorgan Downgrades Beyond Meat On Valuation

Courtesy of Benzinga

One of Beyond Meat Inc's (NASDAQ: BYND) earliest bull analysts downgraded the stock on Tuesday.

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Top Patterns for Retail Investors

Courtesy of Read the Ticker

Retail investors are last in line for market leading research, no matter, the retail investor can profit from these secret sauce patterns..

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Kimble Charting Solutions

Bad News For Crude Oil Should Come From This Pattern, Says Joe Friday

Courtesy of Chris Kimble

It’s a good idea for investors to be aware of key indicators and inter-market relationships.

Perhaps it’s watching the US Dollar as an indicator for precious metals or emerging markets. Or watching interest rates for the economy. Experience, history, and relationships matter. And it’s good to simply add these to our tool-kit.

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Members' Corner

The War on All Fact People

 

David Brin shares an excerpt from his new book on the relentless war against democracy and how we can fight back. You can also read the first, second and final chapters of Polemical Judo at David's blog Contrary Brin.

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Why Blaming the Repo Market is Like Blaming the Australian Bush Fires

 

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Promotions

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In My Top Strategies for 2017, Phil's chapter is Secret Santa’s Inflation Hedges for 2017.

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