VIX futures aint fraud my friend….a true classic

From Mr William J. Brodsky.

Sir, It is disturbing and disappointing that the Financial Times found it worthwhile to publish the rant of a disgruntled trader looking to fix blame after losing money in last week’s market downturn (“Vix Futures will not protect you in the eye of a hurricane”, FT Wealth March 6).

John Dizard’s unidentified “Chicago trader” calls Vix futures “the most rigged game in town”. Had this allegation any discernible merit, it would rightfully reside at the Department of Justice or the Securities and Exchange Commission. Instead it found a home – unchecked – with the FT. “Game” ? “Rigged” ? How? By whom??

Perhaps the market did not move precisely when and how Mr Dizard’s trader source had hoped. It is impossible to know where the misunderstanding lies; amazingly, Mr Dizard did not find it necessary to contact Chicago Board Options Exchange for comment on a CBOE story, even one brimming with dangerously misguided innuendo regarding our products and our markets.

In an article rife with misplaced indignation and irresponsible finger-pointing, Mr Dizard was at least correct on two counts: it is not advisable to buy insurance while in the eye of a hurricane, and volatility does not reliably (emphasis added) move inversely with equity prices. The correlation is not predictable, nor one-to-one, but it is a strong inverse relationship. Hence the term volatility.

Had Mr Dizard and his nameless trader availed themselves of the considerable educational support to be had from CBOE, they would have seen in historical charts that the Vix tends to be negatively correlated to the broad market. When the market goes down, Vix tends to go up in a way that is analogous, say, to the way bonds or gold moves in relation to stocks. They would have learned that it is impossible to predict exactly how much, or how quickly, Vix (or gold or bonds) will go up when stocks fall, that the two do not move in lockstep, and that there are no guarantees of future performance.

We have come to expect better from your publication.

William J. Brodsky,

Chairman and Chief Executive,

Chicago Board Options Exchange

The Distribution of S&P 500 Index Returns by Bill Egan

brush-up  your knowledge of S&P 500 daily moves with this recent paper

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=955639&download=yes

Aggressively’ Sell Global Stocks, Dresdner Says ..but read below

 said Dresdner Kleinwort, the top ranked strategy team in the world.

The strategist predicted “an imminent shakeout of at least 10 percent” in equities, according to the note. Dresdner has had a “structural underweight” in stocks since October 1996 relative to bonds in an asset allocation model. An “underweight” position means investors should hold fewer of the securities than represented in benchmarks.

“Timing has never been our strongpoint,” Edwards wrote. “But we believe `the great unwind’ has now started.”

since 1996!! are u fucking kidding me?? outrageous

 Disclosure: I read these guys and im not long stocks currently

Happy Birthday S&P500 from WSJ

Many Happy Returns By JEREMY J. SIEGEL and JEREMY SCHWARTZ March 1, 2007; Markets go up, and as Tuesday’s dizzying 416-point drop in the Dow reminds us, they go down too, sometimes in a big hurry. Still, we shouldn’t let this week’s jitters pass without noting that today is the 50th birthday of one of the world’s most famous benchmarks for stock-market returns, the S&P 500. Standard and Poor’s, the originators and keepers of the index, estimates that over $1 trillion is directly or indirectly tied to the performance of these 500 firms, selected to represent America’s economy. From its inception on March 1, 1957, through the end of last year, the average annual return of the S&P 500 Index, which today comprises almost 80% of the value of all U.S. stocks, has been 10.83%, a return that most active equity managers have found very difficult to match. The changing composition of the index also mirrors larger changes in the economic landscape. Because of mergers, bankruptcies and other corporate changes, almost 1,000 new companies have been added to the index, as others were dropped, since its inception. In 1957 the technology, health-care, and financial sectors, which today comprise almost one-half the index’s value, made up a mere 6% of the index. The financial sector was particularly small in the 1950s and 1960s since commercial and investment banks, as well as brokerage houses, were not included in the S&P 500 until the 1970s. The biggest industrial sector in 1957 was “materials” — steel, aluminum, chemical, paper and mining companies. The materials and energy sectors made up half the value of the S&P 500 when the index was originated, compared to only 12% today. Still, the stocks in the original index were winners. By far and away the best performing is Altria Corporation, formerly known as Phillip Morris Corp. From March 1957 through December 2006, this cigarette manufacturer, which in 1980 diversified into foods, gave investors a 19.88% annual return, almost double the annual return of the S&P 500 Index. An investment of $1,000 put into Philip Morris in 1957 would have grown to $8.4 million by the end of 2006 — compared to a mere $168,000 accumulation in the S&P 500 itself. Surprisingly, the second best performing stock of the original 500 was Thatcher Glass Co., a profitable milk bottle manufacturer in the early 1950s. When the baby boom turned into a baby bust and glass milk bottles were replaced by waxed cartons, Thatcher Glass was bought by Rexall Drug, which became Dart Industries, which merged with Kraft, and was eventually bought by Philip Morris in 1988. A $1,000 investment in the dominant manufacturer of an obsolete product turned into a $4.95 million bonanza for investors. Other stocks in the 1957 index paid off big. Of the 111 original companies that have survived intact, 20 outperformed the index by an average of almost five percentage points per year. These include PepsiCo, Coca-Cola, Colgate Palmolive, Heinz, Wrigley, Procter & Gamble, Hershey and Tootsie Roll Industries. The pharmaceutical industry performed brilliantly for investors, as Abbott Labs returned nearly 16% per year, while Merck, Bristol Myers Squibb, Pfizer and Schering Plough, despite their recent troubles, all handily beat the S&P 500 Index. The firms that dominated the original list did very well for their investors. AT&T was the largest stock in the index in 1957 with market capitalization of $11.2 billion (that capitalization would rank in the bottom 200 of today’s S&P 500 firms). The telephone monopoly known as “Ma Bell” was broken up in 1984, giving birth to the “Baby Bell” regional providers. AT&T was bought by one of its children, SBC Communications in 2005 and, through other acquisitions, worked itself back to the top 20 in market value. The 50-year return on AT&T, had you also held all the Baby Bells when Ma Bell spun them off 23 year ago, gave you a 10.77% annual return, virtually matching the index. Another perspective: 12 of the 20 largest companies in the original 1957 index beat the performance of the index; and a portfolio of all 20 bested the index by almost one percentage point per year. The winners among these original stocks include all the oil companies (Mobil, Royal Dutch, Exxon, Shell, Amoco, Gulf, Chevron, Phillips and Texaco), as well as General Electric, IBM and Sears (thanks to Eddie Lampert and Sears Holdings). Union Carbide, Du Pont, Eastman Kodak, Alcoa, General Motors and U.S. Steel lagged the index but only one stock — Bethlehem Steel — lost all of its investors’ money. Surprisingly, if an investor had bought a portfolio of all 500 companies that Standard and Poor’s placed in the index on March 1957 and held them until today, he would have not only handily beat the S&P 500 Index itself; he would have outperformed most money managers that have tried to beat it. This is truly remarkable — given that such an investor would have never purchased a single one of the nearly 1,000 new companies that were added to this famous index over the past half century. Happy Birthday, S&P 500. You have certainly aged well.

record A/D line readings…. by Birinyi

Big down days ….by Brett Steenbarger

Such an occurrence is rare. I went back to 1990 (N = 4304 trading days) and could only find 25 occasions of a single day drop of 3% or more in the cash S&P 500 Index. What’s even more rare is to have such a decline in the context of a bull market. How many times in the last 17+ years have we seen a 3+% decline in a market that had been up over the prior 20 and 60 days? It’s only occurred three times out of all those trading days.

But shifts happen. And that, my friends, is why money management and risk control are all important. If you double your money, double it again, and then double it again, only to lose 90% in the next debacle, you wind up down 20% on your initial capital, needing a 25% gain just to return to where you were at the start.

So what happens after big down days? Let’s start with the 25 occasions in which we’ve dropped 3% or more in a single day. At just about every time frame from one to twenty days out, returns following such a large single-day drop are quite bullish. One day later, the S&P averaged a gain of .47% (17 up, 8 down), much stronger than the average single day gain for the rest of the sample of .03% (2256 up, 2023 down). Twenty days later, the S&P was up by an average of a whopping 4.47% (20 up, 5 down), again much stronger than the average 20-day gain of .73% for the remainder of the sample (2641 up, 1638 down). In all, large down days have tended to represent buying opportunities since 1990.

Those findings may be a bit deceptive, however, because–of those 25 large down days–15 occurred in the context of a market that had *already fallen* 3% or more over the past 20 sessions. In other words, large down days have tended to occur toward the end of market downmoves–as a kind of washout. We don’t typically see large down days following intermediate term strength, as noted above.

I relaxed my criteria a bit and found six occasions in which the market had not been down more than 2% on a 20 and 60 day basis prior to the large down day. All six occasions were up the next day, and all were up over the following 20 sessions. Indeed, the average gain over the next 20 trading days was an impressive 3.89%.

What a joke in WSJ to day… anchoring + value defined as recent high. Its great advice for chicken eggs trader

“With so many other industries at records, the challenge for investors will be to find stocks that can go higher still.”

———

Broad Rally Makes Picking
Next Hot Stock Harder

Record-Setting Indexes
Embolden Many Pros;
Will Tech Chip In, Too?

By PETER A. MCKAY
February 12, 2007; Page 

http://online.wsj.com/article/SB117123430404605174.html?mod=mkts_main_news_hs_h

How could it go down … my dear commrade

Although he’s 63 years old, Beijing retiree Du Shuzhan is not afraid to try
new things. He has just discovered the stock market. A few weeks ago, Du
deposited $1,500 in his first share-trading account, and on a recent January
afternoon, visited his local broker to buy shares of seven Chinese
companies. “All my friends started to invest in the stock market last year,”
Du says. “My wife and I decided to join the trend.” Du admits that, when it
comes to deciding which stocks to buy, he lacks expertise. “I don’t know
much about it. I just picked the ones with low prices.” But he figures he’ll
do fine. “With all the money in the market, I don’t see how it could go
down.”

http://www.time.com/time/magazine/article/0,9171,501070212-1584109,00.html

more on CAPM

James Montier :In the little book of value investing, Ch. Brown talks lot about how risk is defined in terms of business risk. It is a risk of buying a bad business. Whereas i think that problem with lot of the financial theory is that in it , risk is equated to price volatility. Its that equation of price volatility to risk – that is probably one of the worst aspects of moder finance.  ”

I add:  1.  the true risk in stock market is buying into a great business that turns into a bad one!

             then what about 2. Buying great business at high valuation ?  

Ben Graham: ” The investor with a portfolio of sound stocks should expect their prices fluctuate and should neither be concerned by sizable declines nor become excited by sizable advances. He should always remember that market quotations are there for his convenience, either to be taken advantage of or to be ignored”

Unexpected down S&P moves …by Steenbarger

it is unusual for a solid rise to turn around and lead to a solid decline; normally there is some rangebound, topping action in between. Thanks to weak housing numbers and rising interest rates, however, selling persisted through Thursday, creating the body slam.

I went all the way back to 1990 (N = 4298 trading days) in the S&P 500 Index (SPY) and measured the day’s gains or losses as a percentage of the prior 20 days’ average trading range. In all that time, I could only find 15 occasions in which a large rise (one in which the gain of the day was greater than the prior 20 days’ trading range) was followed by a large decline (one in which the loss on the day was greater than the prior 20 days’ trading range). Five days later, SPY was down by an average of -.43% (5 up, 10 down). That is much weaker than the average five day gain in SPY of .19% (2411 up, 1887 down). Thirteen of those fifteen occasions broke their slam day lows during the following day’s trade. It appears that markets that get slammed carry some weakness forward in the near term, though caution should be taken when dealing with such small samples. It is indeed rare for large rises to be followed by large declines.

If we just look at large relative declines (drops in which the daily decline is greater than the prior 20 days’ average trading range; N = 360), we can see that those by themselves do not lead to follow-up losses in the near term. Five days after a large relative decline, SPY is up by an average of .39% (211 up, 149 down). Since 2004, we have had 72 occasions of large relative declines; there is modest follow-through weakness in the following two days, with SPY averaging a gain of .02% (30 up, 42 down), but there is no bullish or bearish edge five days out. Interestingly, since 1990, 334 out of the 360 instances (and 64 out of the 72 since 2004) have traded lower than their large decline lows the following day. Finally, I looked at large relative declines as a function of the prior five days’ worth of action in SPY. When SPY was up over the previous five days and *then* experienced the large relative decline (N = 155)–which was the case on Thursday, the next two days in SPY averaged a loss of -.16% (67 up, 88 down). When SPY was down over the prior five days and then experienced a large relative decline (N = 205), the next two days in SPY averaged a gain of .37% (124 up, 81 down).  Indeed, since 2004, when we’ve had a large relative decline following five days of strength (N = 42), the next two days in SPY have averaged a loss of -.14% (14 up, 28 down). That is considerably weaker than the average gain of .24% when the large decline follows five days of weakness (N = 30; 16 up, 14 down).
http://traderfeed.blogspot.com/2007_01_01_archive.html