Briefing talked about VXN today. Interesting to note that VXN was peaking when the Nasdaq recently was - they suggest that we may have a positive correlation instead of inverse relation.>>>>
Now stepping back out for the more conventional 'daily' assessment, this second chart is a daily chart of the Nasdaq Volatility Index or VXN. Under typical market conditions, the VXN tends to be inversely correlated with the Nasdaq and serves as a measure of market uncertainty -- more typically referred to as market fear. Without making things complicated, the index measures the variability in options prices which tend to rise as the fundamental backdrop becomes less certain.
Yet before we assess this chart of the VXN, note that in the preceding paragraph there were several carefully chosen words -- "Under typical market conditions, the VXN tends to be inversely correlated with the Nasdaq." The question in the present case is two-fold: 1) whether these are typical market conditions, and 2) whether the two measures have been correlating inversely?
In the chart below, you can see the Nasdaq's most recent extreme high point was touched at 1521 back on December 2nd. At the same time, the high point on the Nasdaq Volatility Index occurred on December 5th. From the standpoint of time, those two extremes came in very close to a direct match. Put another way, the two measures were characterized by a positive correlation rather than an inverse correlation.
But what about more recently? For the month of March, the VXN touched its highs over a three-session span ranging from March 18th to March 20th. At the same time, the Nasdaq touched its high point on March 21st. Again, this was instance in which the two measures were positively correlated rather than inversely correlated.
So the conventional read on the VXN would suggest the Nasdaq may be setting up for a notable fall in the not-too-distant future. Yet assessing this relationship in its more recent context places the conventional interpretation in question. In fact, it wouldn't be a reach to contend the exact opposite -- the index may be setting up for a pronounced move higher off that Island Reversal pattern addressed on April 3rd. Under this view of the world, the bear market mentality has so firmly entrenched itself, that moves to the upside are triggering the higher fear readings.
In the end, this is one of those unusual instances in which the point is there isn't a conclusive point. The VXN is one indicator among many, and its more recent disposition suggests those other indicators may be worth a good look in the current market. |
