I drew up a table to learn from the chart from a theoretical pov. I don't think you'll mind me rambling on because I think this will give us both a better understanding of what's going on:
If we start with a low p/c ratio of 0.20 and a low vix of 25, and then increase these in 11 instalments of 20% and 10% respectively, we get the following:
pc vix cpc/vix
0.20 25 0.0080
0.24 28 0.0087
0.29 30 0.0095
0.35 33 0.0104
0.41 37 0.0113
0.50 40 0.0124
0.60 44 0.0135
0.72 49 0.0147
0.86 54 0.0160
1.03 59 0.0175
1.24 65 0.0191
1.49 71 0.0208
The first and last readings are reasonable approximations of what could be considered extreme complacency (topping) and extreme fear (bottoming). The readings inbetween are nothing exact or scientific, just data points on the way to the extremes.
A relatively high reading in one indicator together with a low reading in the other might just be a 'bad data point' i.e. a whipsaw day/week.
The use of moving averages would filter these out, which is why the daily readings are not as important as the moving averages.
I think the crossover of the 15 and 100 ma is simply a line in the sand method of determining when a change of the trend is due in the same way that ma crossovers are used to generate buy and sell signals on regular price charts. It might be worth experimenting with different settings.
Does the above make sense to you in determining what is going on? You wrote:
But the ratio of these two things is really tracking two similar contrarian indicators, right? 0.25: 25 is the same as 0.45: 45, so the chart will all depend on the scale at which the two numbers are compared.
I think my little data table above takes care of that scale even if the relationships in reality are slightly different.
Right now p/c is 0.789 and the Vix is 40.89, which gives you a ratio of 0.019, which is extremely low by any measure.
Intuitively, I would have thought a vix of 40 is fairly high and therefore an indicator of relative fear. The relationship of the two indicators actually gives the opposite impression (so much for my lousy intuition!), which is, I suspect, why $CPC:$vix is a better way of looking at fear/complacency than simply looking at the individual indicators. |
