It's usually folly to place too much emphasis on any one indicator, but we've been leaning pretty heavily on the VIX lately.
The "fear gauge" has seen a record fall since the last session in December. Hopefully this is just a natural market movement, and not related in some way to trading activity based on VIX derivatives.
If natural, then it's a remarkable change in sentiment. Everything we've looked at related to its recent moves has suggested trouble for stocks, in the short-term at least (nothing longer than a few weeks).
Here's another one.
Right away on Wednesday, the VIX dropped nearly 3% from Tuesday's close, pushing that index to its lowest level in more than five years. Then it reversed during the day, closing higher by more than 1%.
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We've looked at one-day reversals in other stocks and indexes before, and they're usually not very reliable. This one has been, however. A week after these reversals, the VIX was higher 10 out of 12 times, by an average of 7.4%, and the two losers were both less than -1%.
If the VIX goes up, then that usually means stocks go down, and we can see that in the table below. The table shows the returns in the S&P 500 following VIX reversals like we witnessed on Wednesday.
During the next week, stocks clearly struggled. After that, there didn't seem to be any impact. A month later, in fact, the S&P showed excessively positivestats, with only one small loss.
This supports most of the other VIX-related tidbits we've looked at in the past several days, suggesting a significantly higher-than-average risk for stocks in the short-term of 5-15 days.
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Thursday, January 10, 2013
VIX
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