Tony Sun: Founder of KhronoStock.com
One simple way to translate the VIX index into an easy to understand monthly implied volatility is employing the following equation:
Next Month Expected Volatility = VIX/100/sqrt(12)
The result simply says that over the 30-day period, the SP500 is expected to have a volatility of plus/minus a given percentage.
The following graph shows the historical next 30-day expected volatility from 1990 to 2009. This does reflect the change in VIX calculation method that was instituted in 2003.
The simple historical average of the 1-month expected volatility for last 19 years is at 5.827%. Rising above this level usually represents some kind of turmoil and crisis. Examples include:
1. Gulf War in the early 90s.
2. Long Term Capital Management (LTCM) in 1998
3. 2000 tech bubble burst
4. Sep 11th terrorist attack
5. Inital subprime mortgage crisis
6. Collapse of Bear Stearns
7. Collapse of Lehman/AIG and the following financial and economic collapse
Thus, until the expected monthly volatility of the SP500 goes below its historical average of 5.827% for a sustained period of time, all we can say is that the market simply is taking a break from its primary trend.
I hear a lot of people are still expecting the SP500 to go to 1000 and above. I am not saying that is not a possibility but taking such a position at this point is fairly dangerous. We have to ask ourselves “Is the economic climate improved?” The answer is simply no. Deceleration of economic decline does not translate into economic improvement. I continue to remind people that the current recession has been over 18 months now surpassing all previous recessions and there is still no clear end in sight. If the economy does not pull itself out in the next 6-12 months, we are likey heading towards the 2nd Depression defined as a prolonged period of recession lasting more than two to three years.
Would be nice to be able to click on the picture…
indeed indeed
Cyan and James,
It’s fixed now. You can click on the image and it will automaticlally expand to a larger one. Thank you for bringing this up.
Yea I don’t know why that is the case. But what you can do is right click on the image and open it in a new tab, It will be much bigger and clearer. Sorry about the inconvenience. I’ll see if I can change it.
Tony – Here’s a recent interview on 6/18 with Robert Prechter where he clearly states we have one more leg up in this rally to 1000-1100. Also, if you notice, the USD continues to weaken, which would suggest that we may have one more leg up in rally.
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a3kuGAkNN4eI
Hey Jim,
Haha I didn’t sense any kind of certainty at all. He is simply making a general statement. Keep in mind that Robert has to be very careful on TV when making his projections. Nothing is 100% certain.
Also keep in mind, we did almost get to 1000. SP500 went above 950 so that is only 5% away.
What is most important is that for a hedge fund like strategy that KhronoStock PRO is employing, whether or not we get to this 1000 to 1100, it simply doesn’t matter. We maintain a healthy positive gain with our long and short positions at all times.