Quick Post on VIX

I was curious to see the latest with the VIX. The VIX as you know is a measurement in the volatility of the S&P options. It is really a measure of sentiment and a rise in the VIX usually accompanies declines in the SPX. The VIX reaches it's lowest levels when participants become complacent - our confident in their positions. Many folks put a lot of stock in this reading as a contrarian indicator - meaning if the VIX is at it's lowest levels, we should not be surprised by a down move in the index.

This is really an over simplification and I think a bit dangerous. The reality is that folks rush to options to protect and/or profit from sudden market moves. The VIX measures sentimental reactions to market moves - it is really not a leading indicator. Having said that, we should always keep an eye on the VIX and see what it can tell us.

The chart I put up with this post maps the VIX and the SPX over the past 120 days.



The VIX is the line chart (based on closing values) and the candlestick chart is the SPX. The 200d SMA for the VIX is in white and the 10d SMA is in red (bounded by a 10 period bollinger band). I have added very basic trend lines for both instruments.

Looking at the SPX bottom trend line, we see that the VIX shows a reaction high at each of the related reaction lows of the SPX. This is to be expected - however notice how the spike in the VIX in each reaction high is INCREASING. This indicates that the level of anxiousness with each SPX throwback is increasing. In fact, if you look at the last 20 days or so, you will see that even though we are near our lowest levels on the VIX, the bottom levels of the VIX are also RISING.

If we were to follow the VIX top trend line we can expect a MAJOR spike in the VIX very soon - to levels above 30 - which is a 50% increase from where we are today. A spike in the VIX of 50% would imply about a 10% throwback in the SPX. (You can do the extrapolation from the prior three VIX spikes and SPX reaction lows).

This simple calculation seems to jive with many of the other observations and levels that I have calculated in recent weeks. I may consider playing the VIX along with my short positions. This quiet period may be the best time to take a position.

Enjoy!