Friday, December 19, 2008

VIX Decline Showing Market Complacency; Dec. 19, 2008


Attached is a daily chart of the VIX. The VIX is essentially a fear indiator. The higher the VIX, the more option put buying and therefore more fear. The lower the VIX, the less fear in the market. VIX lows and low fear can accompany market tops because people have become overly optimistic and complacent. Granted the VIX is much higher than it's "normal range in the 15-20 area, but it has come down significant this week as you can see in the chart. This doesn't tell us that a turn down is coming now, but it does tell us that the market is setting itself for another big sell off soon. The more bullish/optimistic the market, media and all the financial news pundits are, the more bearish this market becomes. I think sometime after Christmas, or perhaps after New Years, we'll see this market start to roll over again. I'll be watching closely during those times for signs of a turn.

6 comments:

Michael K. said...

Wow, thanks again for sharing your knowledge about breath and now VIX. I guess I will be keeping an eye out on VIX as it rise to sell.

Michael K. said...

Hey, I notice on Nov 4, the VIX is around 48 making the S&P 500 just over 1,000. Now that the VIX is around 44, shouldn't the S&P be above 1,000?

Michael K. said...

wait, nvm about the last post, it seem like if VIX reach 80, that is a good time to start buying.

Todd S said...

When the VIX spikes really high really fast it's a sign of a panic, and you "usually" want to buy panic because it can market a bottom. So when the VIX drops down real fast, it shows complacency, and if you're looking for a top, then that's a good contributing indicator that a top is coming.

Michael K. said...

Umm, the nasdaq 100 is getting way ahead of the S&P, so should be holding my position?

Todd S said...

See my latest post "Double Top" to see if it helps you.

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