That's another excellent post on VIX by Price Headley.
I will also post few good VIX link which I read last week.
Those links may not be there in the future so here is a hard copy:
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The VIX spells t-r-o-u-b-l-e
Longtime readers know that I love to follow the CBOE Volatility Index ($VIX,X) as a barometer of investor fear or complacency.
I believe that when the VIX hits relatively high levels, options players are typically panicking.
Their rush to buy puts as the market drops sends the volatility priced into put options surging, resulting in higher-than-normal VIX readings.
In contrast, when no one wants puts to insure their portfolios or to bet on the downside, the volatilities priced into these options tend to dwindle, showing a lack of worry about future downside risk. Historically, that is just the time when you should be positioning for downside in the markets, as I pointed out in prior alerts.
We are currently at another one of those junctures where most investors are showing a surprising lack of worry despite a rather uninspiring market.
In the past three weeks, the VIX has plunged from a high at 41.16 to Tuesday’s close at 26.04.
I analyze the VIX in this case based on 20-week Bollinger Bands to measure what is a relatively low or relatively high volatility level.
Using plus and minus two standard deviations, the VIX should typically trade within these bands roughly 95% of the time.
So trading outside of these bands is relatively unusual and often signals a turning point is near.
As you can see from the weekly chart of the VIX below compared to the Dow Industrials, the tags of the lower band on the VIX have been particularly good times to bet that a market top was in the making.
Followers of the CBOE Nasdaq Volatility Index ($VXN.X) will also note that this index has also tagged its lower weekly Bollinger Band to add further confirmation of a relative volatility low point marking trouble for the Nasdaq indexes also over the next several months.
These bearish signals are not reversed until we see the upper band tagged, which for the VIX is currently at 39.67.
What’s more disturbing about the recent plunge in the VIX is that it has come amid a relatively uninspiring market performance this past month.
From the prior peak in the VIX on March 12 at 41.16, the Dow gained 13.3% to date.
Previous rallies from prior VIX peaks were much stronger, most notably +25.6% off the October 2002 low and over 32% off the September 2001 bottom. This concerns me that the rally we should have seen as war fears faded was weak for a reason, and that the ensuing decline could be particularly nasty.
Given that stocks are nearing the end of their favorable six-month seasonal period at the end of April, this further adds concern as we move into the historically weak May-October seasonality.
This low VIX sell signal is only bad news for those who are unaware of it or have no way to profit from it. I expect there to be tremendous profit opportunities in bearish positions using short sales of stocks and futures, bearish mutual funds, and put options. If you are not set up to use one or more of these bearish vehicles, you owe it to yourself to learn more about how you can do better than cash in the coming market downturn. If you have questions about any of these bear tools, e-mail me at askprice@bigtrends.com |
