In terms of stock market analysis, I don’t do a lot of things the way you are “supposed to do them” - I’ve spent a lot of time creating my own theories and refining them. When it comes to measuring or sensing stock market volatility, I do not follow the VIX. Call me crazy but I prefer to look at the action in the 3405 stocks I cover every week to determine how volatile they are rather than an index based upon options activity in the S&P 500. There are many ways to measure volatility - I’ve created my own methods rather than relying on something I don’t find either intuitive or accurate.

During an average week, the HEDGEfolios database typically has about 300 signal changes in a universe of stocks that now sits at 3405. While some weeks are approximately 50/50 on the new UPs versus new DOWNs, an upward trending market will tend to be closer to 75% new UP signals and conversely, a downward trend will have a 3:1 ratio of new DOWN signals. When volatility picks up - the total number of signal changes at HEDGEfolios may jump to a number like 500 which I consider to be extreme and the ratio of new UPs to new DOWNs will exceed 5:1 which is also extreme.

In very rare circumstances, I have seen two distinct conditions.

The first is High Volatility one week in one direction followed by a reversal with High Volatility within the next two weeks in the opposite direction. That has happened precisely three times since I started tracking this data in January 2005 - I mention the week followed by the HEDGEfolios bias in parentheses.

1. 2/12/2007 (bearish), 2/20/2007 (bullish) and 2/26/2007 (bearish) Prior to the Asian…Carry Trade reversal….Dollar/Yen market selloff.
2. 5/29/2007 (bearish), 6/4/2007 (bullish) and 6/11/2007 (bearish) Prior to the beginning of the credit crisis selloff.
3. 2/25/2008 (bullish), 3/3/2008 (bearish), 3/10/2008 (bearish) and 3/17/2008 (bullish) Prior to the Bear Stearns Bailout rally.

I most recently wrote about this increase of volatility (as I measure it) on March 2, 2008 and again on March 13, 2008 - the day before the Bear Stearns problem was revealed.
The other volatility condition occurred during the past two weeks where I saw High Volatility measures in the same (bearish) direction on two consecutive weeks. On June 23rd, I changed 675 stock signals with a ratio of 10 new UPs for every 1 new DOWN. That was extreme but this week was even more noteworthy. I changed 807 stock signals with 633 new DOWNs vs. 174 new UPs. In the past 6 years that I have done HEDGEfolios, I have never done something so extreme two weeks in a row. During the past month, I have changed 1961 signals with 1651 new DOWNs and 310 new UPs.

I know this may be tough to follow because it is not traditional and anecdotal observations that rarely occur are very tough to evaluate. I get that. My work is not traditional so it is easy to disregard. On June 3rd, I mentioned a rare instance of Divergent Signals in the ETF signals and tried to warn that this typically signals a major market reversal. Other than a few readers of this blog, it was disregarded. Now I am making this new observation. Do what you want with it. I don’t need to tell you that the market is volatile - you already know that whether you watch the VIX or not.

However, the key element of volatility using traditional methods like the VIX rests on the reversal at extremes in a contrarian indication such as buying when the VIX exceeds 30. This is a very dangerous concept and I do not advocate for its use.

I never liked that approach so I do my own thing and look at each stock, the turnover in each and how the composite of all signal changes indicates the market volatility. As for the timing of market reversals, I primarily rely upon this anecdotal data and the HEDGEfolios Timing Indicator. If you look at it, you’ll see that the HF Bearish (red line) has never been so high and you might notice that my indicator went Bearish on June 9th.

On June 9th, the VIX opened at 23.56 and on Monday of this week, it opened at 24.25 with very little changes during those 3 weeks while the market fell 6% over the same time period. What did the VIX tell anyone? And yet, I am sure that the VIX lovers and experts will find a way to mention how great it is when stocks finally head higher, especially if that happens shortly after the VIX hits an extremely high reading.

If you are successful using the VIX or any other common volatility measure, I encourage you to keep doing it. If you are like me and think the VIX is a waste, then I encourage you to come up with your own methods.