VIX Has Room to Run

In such an environment of fear and new price lows, one would expect a spiking Volatility Index, indicating that volatility is at correspondingly high levels (and that put and call options are thus more expensive to provide protection).  This non-confirmation is odd.

The bottom line shows the S&P 500 and the three corresponding lows that occurred in October and November (along with today’s swing low).

The VIX is trapped in a sort of triangle or rectangle consolidation, hinting that a break (to the upside) would carry prices to higher levels after forming this base, but honestly what is it going to take to cause the VIX to spike up to levels one would expect it to do so?

Look closely – though the S&P closed lower in November than it did in October, the VIX failed to spike to a new high.  Are investors becoming complacent and just accepting that lower prices are here to stay?  Is the VIX about to spike to new highs?

Traditional thinking states that we won’t see a (short-term) bottom until the VIX spikes and fear takes over… and if that’s the case, then it clearly hasn’t happened yet which implies prices have further to fall to the downside.  One observes VIX spikes (or peaks) at market turning points (however short-term in nature) and it doesn’t appear we’re likely to get a reversal off the levels the VIX rests at currently.  A 14% single-day gain is impressive, but not enough to break us out of consolidation.

For more context, Bill Luby at VIX and More details the VIX Index and the S&P 500 over the last two years, with a special overlay of new events and how both the VIX and S&P reacted.

To learn more about the construction and specifics of the VIX, brush up on the Wikipedia Article on the VIX.

Bottom line:  If classic interpretation on the VIX still ‘works,’ then we’re set for lower S&P 500 prices in the short-term and need to see a spike up in the VIX (’fear’) before we put in any sort of price ‘bottom.’

Corey Rosenbloom
Afraid to Trade.com