VIX Update:
As of today, the current SPX decline from the September 1 high to today's low reached 9.56% and VIX reached 27.89. By way of comparison, the VIX peak associated with the 4/14 low was 41.53. Does VIX have to go well into the 30s to make THE bottom? I don't think so, and here's why.
The SPX drop ending on 4/14 was 12.3% and covered only FIVE days, falling from a point that was less than 2% below the all time high, which had been achieved by SPX running up 12.6% in SEVEN days. Those are big moves in both directions in a short time, which necessarily means a lot of volatility. Daily market fluctuations back then were typically large, and VIX was basing in the high 20s.
What we have now is a very different situation. We are approaching some significant lows in a steady decline at a rate comparable to the decline in the second half of July, when VIX stayed in the low 20s. We are already down nearly 10% from the most recent high, and 13.8% from the yearly high. Will any of these lows hold the market up? I have no idea, but there is a lot more to suggest that a bottom of some sort is not too far away, and that is likely to bring in enough buying to at least maintain a fairly steady rate of decline. Even if a lot of money does not flow in, I hear so many people talking about being heavy in cash it suggests there is not a lot of money for active investors to pull out of the market, and I have the feeling a lot of really strong market dumps are precipitated by active investors yanking their money out fast. If the institutions all yank, we could still fall hard, but I don't think they will at these levels. Bottom line is, I think we are way too far into this decline already to expect a strong VIX peak to emerge.
I'm not predicting a bottom, but I'm also not waiting to see the VIX run into the mid 30s on this bottom, even if it continues to much deeper levels. If we do go lower, when we finally do get a rally then the market could regain sufficiently higher levels and bring in enough of the sidelines cash to set the stage for a harder faster decline. That may even elevate VIX to the levels we have seen in the last couple years, but THE bottom that accompanies this higher VIX might well be a higher bottom than the slow deep one we put in here, much the same as the high-VIX April bottom was higher than the low-VIX February bottom on SPX.
Just my $.02
Dan |
