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November 24, 2006

Estimated OLS of SPX to VIX
by Arthur Eckart

Below is a daily SPX to VIX chart (black dots) with SPX (green line) and VIX (below price chart), since 1990. The gray line is the estimated OLS (ordinary least squares or best fitting line) from 1990 to 2000 (over a structural bull market period). The OLS of the SPX to VIX ratio is upward sloping, because over time SPX will rise, while VIX will trade in a range.

The chart shows the SPX to VIX ratio is at the furthest distance above the OLS line since at least 1990. Also, the steep slope and extended rise, since July, has been the greatest since at least 1990. So, the ratio indicates SPX is severely overbought and there may be little upside short-term. Also, there may be a substantial pullback intermediate-term.

Arthur A. Eckart
PeakTrader

Arthur Albert Eckart is the founder and owner of PeakTrader. Arthur has worked for commercial banks, e.g. Wells Fargo, Banc One, and First Commerce Technologies, during the 1980s and 1990s. He has also worked for Janus Funds from 1999-00. Arthur Eckart has a BA & MA in Economics from the University of Colorado. He has worked on options portfolio optimization since 1998.

Mr Eckart has developed a comprehensive trading methodology using economics, portfolio optimization, and technical analysis to maximize return and minimize risk at the same time. This methodology has resulted in excellent returns with low risk over the past three years.

Copyright © 2006 Arthur Eckart

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