Tuesday, July 14, 2009

The VIX to SPX divergance: Bearish, plain and simple.

Here is a prior post of mine (link above) just talking about my opinions on the vix, and it's use as a longer term market tool. (fyi: the vix moved to 35 on that move, not 36....so I overshot the target by 1)

Ok, so big deal... when the market tops the vix bottoms, what good is that? It's not any good
Is it "EASIER" to spot a vix bottom than it is a market top? Nope.

So Why it is important:
Since 956, one would expect since the market is now lower....so obviously the vix must be higher right? WRONG (vix had it's lowest daily close today since Sept 2008!)

This is bearish for the market, and I am sure some super bull would of course argue that the lower vix is bullish, but I would ask them to show me a chart where the vix served as a leading indicator. (its NOT a leading indicator). But more importantly, ok....so if a LOWER vix is bullish, then why are we now NOT above 956 spx? I mean the vix is lower now, so if its "bullish", why are we only at 905? I rest my case.

So the 64,000 question would be "Has the vix bottomed"? I haven't a clue. No one has a clue.
Again there is NO difference is trying to spot an spx top OR a vix bottom, those are BOTH total fools games, and they award no "bonus" points or money in your account.

All that I am reading and interpreting from this divergence is just what it is and nothing more.
It is a piece of the larger puzzle.

The VIX is moving down more, even though though the spx has not moved up.
So back to why this is bearish. Pull up at 20 year chart on the vix.
The vix does NOT go under 10. It just doesn't, there is a blip of 9.37 in 2007, which was about it. Is this VIX going to 10 here? I doubt it, it just illustrates that its actually NOT a totally unknown variable, as we know there is a floor to it.

Mathematically...the spx might go to 30,000. (trying to make a point, bear w/ me. There is nothing saying that it cant, this is a total unknown variable)

We do know, that the vix can NOT go below ZERO.
And it basically never goes below 10, from its history, even in raging bull markets.
(So this has a limit to it, making it differant)

In conclusion, the observation is such:
The "Fear" is departing, yet the market is NOT moving up "lock in step" with it.

Well if the market is not really going up (as much compared relativly) when the fear is departing, then what is going to happen to the market then when the fear returns?

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