|
Many of you may have heard of the VIX. But to refresh your memory it is the ticker symbol for the Chicago Board Options Exchange Market Volatility Index and is a widely used measure of the implied volatility of S&P 500 index options. It is a measure of how relaxed or stressed investors are with where the market is at.
Let’s look at a VIX chart:
click to enlarge
I have marked in yellow periods when the VIX has been below 20 and these are periods where investors are relaxed. But we can see that in the second half of 2009 it rocketed almost off the radar.
We can look at this period of time and also look at what the market was doing by overlaying the VIX over the DOW:
click to enlarge
It is interesting to note that by October 2010 when the VIX line crossed above the DOW – that is deep fear to put it mildly – had set in. In fact it had become fear of fear and the market was already over half way to its low of March 2009. So if one wants to use the VIX as a guide as to when to exit, a tighter ‘stop’ such as 30 may be necessary. But like any trend following indicator it will have you in and out of the market with great regularity making only your broker happy.
You can apply all sorts of indicators to the VIX:
click to enlarge
I have applied my trusty Elliott. What Elliott is saying is that we could see the VIX head down to a level of 15 on the scale – everyone’s in the comfy zone.
And if you look at the first chart you can see that we can stay in that state for years!
Another pointer to an extended range trading market?
Enjoy the ride
Tom Scollon
Chief Analyst |