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The VIX Says BEARISH!
If you've read this column for any length of time, you know that I consider the CBOE Volatility Index (VIX) to be one of my favorite contrarian indicators at the extremes. We are at one of those points right now .
Look at the chart below, which shows the S&P 500 (SPX) on the top half of the chart, and the CBOE Volatility Index (VIX) plotted on the same time scale on the bottom half of the chart. I've plotted 80-day Accereration Bands to define the relative exteme high and low points for each of these indexes.
Daily Chart of S&P 500 (SPX) and CBOE Volatility Index (VIX)
<center><img src='http://upload.pro-at.com/200409/spx.gif' alt='' /></center>
<center><img src='http://upload.pro-at.com/200409/vix.gif' alt='' /></center>
Look at each time the VIX has fallen down to the lower 80-day Acceleration Band, around the 14% level. This previously occurred in late February, late April, late June and mid July. You'll notice that when you line up these relatively low levels in the VIX with the S&P 500, you see major market tops. In contrast, a surge in the fear index as measured by VIX up to the upper Acceleration Band in mid-March, mid-May and the second week of August signaled very tradable short-term bottoms.
So you see where we are now? Clearly the fear has come out of this market, and we now hover within a fraction a point of the lower band, which signals complacency from investors and a likely move to the downside over the next 3-4 weeks. So don't be lulled to sleep be the recent rally. The odds now favor more risk than reward, and option players get a double advantage in buying puts: not only do you profit with put purchases as the downside move occurs, but you can buy put options relatively cheaply at lower volatility levels now, only to sell them out at higher volatility levels after the ultimate surge in the VIX to the upper band, currently near 19%.
If you've read this column for any length of time, you know that I consider the CBOE Volatility Index (VIX) to be one of my favorite contrarian indicators at the extremes. We are at one of those points right now .
Look at the chart below, which shows the S&P 500 (SPX) on the top half of the chart, and the CBOE Volatility Index (VIX) plotted on the same time scale on the bottom half of the chart. I've plotted 80-day Accereration Bands to define the relative exteme high and low points for each of these indexes.
Daily Chart of S&P 500 (SPX) and CBOE Volatility Index (VIX)
<center><img src='http://upload.pro-at.com/200409/spx.gif' alt='' /></center>
<center><img src='http://upload.pro-at.com/200409/vix.gif' alt='' /></center>
Look at each time the VIX has fallen down to the lower 80-day Acceleration Band, around the 14% level. This previously occurred in late February, late April, late June and mid July. You'll notice that when you line up these relatively low levels in the VIX with the S&P 500, you see major market tops. In contrast, a surge in the fear index as measured by VIX up to the upper Acceleration Band in mid-March, mid-May and the second week of August signaled very tradable short-term bottoms.
So you see where we are now? Clearly the fear has come out of this market, and we now hover within a fraction a point of the lower band, which signals complacency from investors and a likely move to the downside over the next 3-4 weeks. So don't be lulled to sleep be the recent rally. The odds now favor more risk than reward, and option players get a double advantage in buying puts: not only do you profit with put purchases as the downside move occurs, but you can buy put options relatively cheaply at lower volatility levels now, only to sell them out at higher volatility levels after the ultimate surge in the VIX to the upper band, currently near 19%.
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