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Thursday, January 10, 2013

VIX


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%.



 
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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