Bottom Calling Methods

Many have attempted to call the bottom in the current market distress.  We are planning a longer article on this subject, looking to some of the experts on various indicators like the VIX.

There are plenty of  VIX amateurs.  These are people that go on CNBC and offer an opinion based upon simplistic comparisons to old VIX readings.  If you asked them how the VIX was calculated, they would not be able to answer.  They are reaching for pitches out of their "happy zone" as we pointed out yesterday.  They would have bought at VIX 30, 40, 50, and 60.

We look to our featured experts like Adam Warner, who has repeatedly explained why it might be right to buy high implied volatility, and Bill Luby.

None of the technical indicators have worked well.  None of the fundamental methods work in a period of forced sales, which we highlighted last week.

The Gong Model

Many readers have inquired about our own "Gong Model."  The whimsical name is drawn from the expression that no one rings a gong at the bottom.  We have been bearish in our public posture throughout the decline as noted in our weekly TCA-ETF updates, waiting for a good signal.

The Gong has two steps.  First the hammer has been drawn back.  We have been surprised that this did not happen sooner, consulting with our system guru, Vince, after each day's trading.  The Gong has been patiently correct, defying all of the other indicators.  We found it difficult to believe.

To our surprise, it was only yesterday that the hammer pulled back.  We now await the swing, something that we will act on for our investors and communicate shortly thereafter.

The government moves were an important step in unfreezing credit markets, removing counter-party risk.  This is the first of several indicators that fundamental investors should have in mind.  Now everyone wants to know how the Paulson Plan will increase lending.  There are several indicators of this that we are following.


Investors waiting for the right pitch will have the opportunity of a lifetime.  The Gong is not a precise trading bottom (check it out here, and ask for the report via email), but it does signal an "all clear" where investors have a much better risk/reward ratio.

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  • Bill aka NO DooDahs! October 16, 2008  

    The high levels of the VIX have only been appropriate to the high levels of actual volatility. There’s been no “excessive fear” signal from the VIX during this selloff.
    With the VIX, I used different estimators of volatility in the index, things like different length lookbacks of ATR or Bollinger Band width, as the independent variable in regression vs. the VIX, and used the error term as my indicator of “pure sentiment” decomposed from the actual volatility. The implicit assumption, which is robust in my opinion, is that the VIX as an estimate of future volatility is heavily influenced by recent actual volatility.
    Other measures of sentiment such as breadth of participation have signaled bottoms already – several times!
    The technicals are FUBARed by all the forced selling. It has got to make it worrisome for the discretionary trading crowd (with exception of daytraders who are probably loving it – provided they’re not “providing liquidity” in their systems).

  • Adam October 16, 2008  

    many tanks.
    Got even worse today. They added a new feature, saying they were going “short” the VIX at 80. Um, can’t actually do that, Octs are the closing thing and they were “only” high 60’s at the most, and all you get is 3 days play and cashed out.
    All of course forgetting those great signals at VIX 30 and 40 and …….

  • Poppa Bear October 23, 2008  

    I wouldn’t try to pick a bottom right now. We’re probably witnessing the biggest financial meltdown in history.
    Should anyone be playing around in a market with bank collapses, hedge fund liquidations, and the massive unwinding of the quatrillion dollar derivatives bubble?
    No one has ever seen anything quite like this and there is really no way of knowing what will collapse next or what the next collapsed entity will affect.
    The dollar will eventually collapse and I think that’ll be a rude awakening for everyone.
    This is a good article on what Warren Buffet is doing with his Treasury holdings…

  • bikiassam August 5, 2009  

    I agree. I won’t try to pick a bottom right now. I believe this is one of the biggest financial meltdown in history. I don’t know what to invest, where to invest and how to save my money.
    Playing in a market where banks are collapses, hedge fund liquidations and such other volatile things are happening is really dangerous.