Friday, September 25, 2009
The VIX Stabilizes: Implications
The nearby 2-year chart of the stock market's "volatility index" (VIX), also imprecisely called a fear index, shows the fabled second derivative of the trend turning bearish (i.e., less bullish as the decline is in abeyance for now). The VIX peaked in the fall as the worst part of the advance-decline number of stocks occurred, and had a secondary peak into the current bear market bottom in March, then declined steadily as the stock market marched upward with few pauses.
Mais voila! The VIX has more or less flattened the past 2 months and is well within its trading range of the past 2 years. From the beginning of 1997 till the end of 2003, the VIX probably averaged about 25--exactly where it closed Thursday. Stocks traditionally fall when the VIX rises, though the mathematics of calculating VIX do not necessarily imply that relationship.
Even if a new bull market is underway, a simple view of the chart suggests that a spike in the VIX to 40 would be an ordinary test of "resistance". Patient and brave bulls might find that a convenient entry point.
Of course, there is nothing in the chart to suggest an actual trend change, but we are now for the first time since the major bear market took hold a year or more ago both at longer-term "support" for the VIX with as much chart suggestion of a move up as a move down.
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