Jul
8
Absurd Studies, from Victor Niederhoffer
July 8, 2008 |
There have been a number of absurd studies over the transom lately. VIX has to go above 29% for a market bottom because that's what it's done at the bottom of other market declines. Equally ridiculous is that the average market decline when it's gone down at least 20% is 27%. What these studies fail to note is the expectation from a given level as of a closing price. They are flawed because of retrospection and perfect knowledge as well.
Lawrence Schulman writes:
I don't think those studies are absurd at all. The four big selloffs we had last August, November, January, and March had VIX going above 29. Right now the market has taken out the previous lows. So I think it is wise for anyone to have some cash on the sidelines since the probablity would favor another large VIX spike. As far as the average bear market's being down 27% from the top, I would have told an investor: when the market is down 20% from its bull market high — which happened this week — the likelihood is the market would not stop going down once it hit the 20% pullback. And on Friday the market was down 22% from its bull market high.
Andrew Goodwin remarks:
Seems absurb that a bell will ring at a market low, which was to be announced, according to multiple pundits, by a VIX move above 30. The markets normally confound attempts at bottom fishing by the masses. Those looking to the contrarian idea that an indicator so scrutinized by the public could not possibly work, and even citing the Heisenberg principle, were taken aback when the tool worked this time. This time was different because the smart money contrarians outsmarted themselves by looking for deception. The VIX lady really did sing at the end and it didn't convince all.
Comments
9 Comments so far
Archives
- June 2013
- May 2013
- April 2013
- March 2013
- February 2013
- January 2013
- December 2012
- November 2012
- October 2012
- September 2012
- August 2012
- July 2012
- June 2012
- May 2012
- April 2012
- March 2012
- February 2012
- January 2012
- December 2011
- November 2011
- October 2011
- September 2011
- August 2011
- July 2011
- June 2011
- May 2011
- April 2011
- March 2011
- February 2011
- January 2011
- December 2010
- November 2010
- October 2010
- September 2010
- August 2010
- July 2010
- June 2010
- May 2010
- April 2010
- March 2010
- February 2010
- January 2010
- December 2009
- November 2009
- October 2009
- September 2009
- August 2009
- July 2009
- June 2009
- May 2009
- April 2009
- March 2009
- February 2009
- January 2009
- December 2008
- November 2008
- October 2008
- September 2008
- August 2008
- July 2008
- June 2008
- May 2008
- April 2008
- March 2008
- February 2008
- January 2008
- December 2007
- November 2007
- October 2007
- September 2007
- August 2007
- July 2007
- June 2007
- May 2007
- April 2007
- March 2007
- February 2007
- January 2007
- December 2006
- November 2006
- October 2006
- September 2006
- August 2006
- Older Archives
Resources & Links
- The Letters Prize
- Pre-2007 Victor Niederhoffer Posts
- Vic’s NYC Junto
- Reading List
- Programming in 60 Seconds
- The Objectivist Center
- Foundation for Economic Education
- Tigerchess
- Dick Sears' G.T. Index
- Pre-2007 Daily Speculations
- Laurel & Vics' Worldly Investor Articles
Also, stocks sometimes decline nine months ahead of recessions and occassionally have peaked a month after the recession started. Expectations would have to play catchup in the late declines. With the popular trade being short stocks and long energy, that unwinding might be interesting. Oil prices seasonally back off around mid-July. Haver Analytics said miles driven have been declining since 2006, so were declining well ahead of the latest runup. Basic materials have already caught up with financials when you look at short-term growth rates.
Also what these studies fail to note is that there is a greater incentive to buy stocks due to a relatively low VIX and beaten down market in view of cheap put protection with unlimited upside potential on longs. There are those that shoot worthless stats left and right to clients while others seize on the opportunity.
Actually 35-40% if you look at 2000 - 2003 bear market. Well this is what science is all about. Look into past and get hit by future.
In general, far too much emphasis in the media and the blogs on the VIX, also far too many people looking at levels like 10% and 20% as if they mean something. The journalists at least have an excuse — they HAVE to say something the average person the street can understand even if (especially if?) it’s nonsense. The bloggers and newsletter writers? I don’t know but it looks like lazy thinking to me.
SP is oversold: what (do studies show) historically happened, following 6 straight down-weeks?
Oh, wait a moment: how do you check that against the background of 6 straight monthly Non-Farm Payroll losses?!
i just like the phrase 'over the transom' — good one!
I do agree with Vic here. I have now built quite a few trading models. I’ve spent hundreds of hours between work and school testing many different theories. I can say that from first hand experience many, oh painfully so many models that perform something 3:1 odds of gaining over 1.5% to 2% per trading day in one stock yield something entirely different in another. (PAINFULLY DIFFERENT!). In each stock the thesis may stay the same, but I have to adjust long term slopes relative to the shorter term movements in such a way I have to conclude that I am just reshaping my model to each stocks history, which its future is largely independent of. What yields bottoms now, may or may not later. “May or May not” is not good enough, period. One model with much tweaking and combing can look fantastic in the hindsight. I say this is true with first hand experience… and much pain and disappointment.
As what I have to say about the “Pull further away” comment… I have found that there is a symbiotic multi-time series dependency. Models that yield better bottoms do so as longer price slopes, or trajectory is increasing with higher confidence… less variability etc. The shorter measures affect the longer measures, and vice versa, and they are dependent, to a certain degree, on one another. Dips in markets can turn into runs, or dips can be reversals, but there is a tendency based on longer term factors, and it is not as simple as short-term percentage loss gain versus long term percentage loss gain… daily ranges and such are rudimentary in such studies….An index falling 20 percent when very long term ranges are low may seem lucrative….but it matters on which time frame and how they all affect each other…plus other factors that can debated endlessly.
The simple flaw with the notion that a >20% market decline is likely to extend to the average >20% decline of 27% is: a 20% decline could still imply a likely positive return over a subsequent time period (1 month, 3 months etc). Any study of average market declines suffers from the fact it ignores what happens once the decline ends. Thus, as Vic says, we learn nothing about expectation.
[Editor's Note: Bingo, Mr. Mahan! I think you've got it!]
VIX breaks 29% on July 15 at the open, then peaks at around 30.7% at 10:09am right at the, um, er… at the bottom.