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Thursday, July 21, 2016

Daily update 7/21 VIX

Interesting day. We had the first real selling pressure since the break out.  All morning the market was just muddling around.  I heard somebody on TV say that European airline stocks were down significantly because one of them said bookings were down and blamed it on terrorism.  Within minutes both stocks and oil started down and gold and bonds started up.  Was there a connection?  I don't really know.  A late day bounce reduced the damage in stocks considerably.  Since 2001 my greatest fear in regards to terrorism was lone wolf attacks by people willing to die to hurt others.  How do you stop them?  Civilization exists by people living by a set of rules.  You know the don't lie, cheat or steal kind of thing.  The most important rule of all is not killing each other.  While the percentage of deranged individuals in the world is small their numbers are large because of the shear number of humans on the planet.  I call this the law of large numbers.  This applies to everything.  For instance, left handed people are about 10% of the population.  With 7 billion people on the planet that is 700 million lefties.  A lot of lone wolf attacks would change civilization as we know it.  The organized attacks we have seen for many years that came fairly far apart in frequency have not hurt the economy.  High frequency lone wolf attacks might.  I don't really know if that thought was what spooked the market today or not.  Maybe it was just coincidence with the news report.

While SPX traded below yesterday's low it was able to close above it (just barely).  The breadth was -56%.  New highs slipped some to 165. 

The futures tested below the 20 SMA, but bounced back to close above it.  This is the first pullback to that MA since the break out to new highs.

The green count slipped back below 50.

Now we are talking.  The market has worked off the overbought condition a bit.  It should either launch a new leg up or break below the 20 SMA on the futures and put us in pullback mode. 

Here is some interesting research on the VIX.  Indicator of the Week: What Happens After an S&P Snap-Back Rally?

VIX Makes New High Then Low: The CBOE Volatility Index (VIX) measures expected volatility of option prices on S&P 500 options, and it tends to move in the opposite direction as stocks. So it's not a huge surprise that a similar signal, except backwards, occurred for the VIX just a week ago.
Specifically, I'm looking at times when the VIX spiked to a three-month high, and then within a month was down to a three-month low. The VIX is generally thought of as a "fear gauge," so it suggests that traders panicked for a brief moment, and then the panic quickly dwindled into complacency. The table below shows how the SPX performed after these occurrences since 1990 (as far back as we have VIX data).

You can see the 13 previous signals tended to occur just before a weak market. The average return and percent positive after these occurrences are lower across all time frames, compared to the typical market returns since 1990. It's typically not a good sign when market players become complacent.

After 6 months the percent positive was only 53.8% as opposed to anytime of 72.2%.  Lots of people are trumpeting the break out as a very bullish event.  We will only know in the fullness of time, but.the VIX says it may not be all that bullish.


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The information in this blog is provided for educational purposes only and is not to be construed as investment advice.