On VIX: Very nice colors on that chart, Mr. Douglas - also just a darn fine chart even apart from the colors.
To the extent that the VIX remains reliable at all - an issue put in doubt by longtime observers such as Bernie Schaeffer (as posted on MDD some weeks ago) - it would be, in my understanding, as an indicator of relative extremes, not as a directional indicator per se. As you will see if you move the time bar on your very pretty and useful chart back a bit, the same levels or relative moves on the VIX can precede moves in any direction. Unusually high or low levels may presage reversals, and reversion to the mean (i.e., "0" on your oscillator) tends to accompany continuation of a new move/establishment of a trend, until a crossover to the opposite extreme suggested a new reversal and so on.
I think that plotting the VIX as an oscillator, rather than on an absolute scale as many like to do (even trying to apply MACD and other trend indicators), actually makes some sense, and partly answers one of the problems in assessing the VIX (a tendency to look for particular high or low historical levels without regard for underlying alterations). That said, I'm not sure that the current reading, even if the classical interpretation still holds, and holds for the Nasdaq, tells us much. A resumed rally in both the S&P and Nasdaq might tend to accompany movement in the VIX to a low extreme, but (avoiding gut feelings here) I'd see at least equal reason to expect a snapback to more recent relatively high VIX levels accompanying a deepening pullback in the major indices. |
