Today’s VIX is around 15. A VIX of 15 means that the options market is
implying that there is an expected annualized 15% change in S&P 500 value
(up or down) over the next 30-days.
Stated more exactly, and on a non-annualized basis, there is 67%
likelihood that the change in S&P 500 will be less than 4.3% over the next
30-days. (Yes, VIX was invented by a Professor.)
The NTSM analysis uses a reasonably
sophisticated way of analyzing VIX and relies on the so called first and second
derivative of VIX, or simply, the rate of change of VIX and the change in
direction of VIX. We generally don’t
spend too much time looking at the absolute value of VIX.
Now might be a time to reconsider that
philosophy.
VIX dropped to the vicinity of 15 once
in 2010 and a few times in 2011. In 2010
when VIX couldn’t get below 15 we experienced a 15% correction. In 2011, the VIX bounced in the vicinity of
15 three times before the 22 Feb start of the rough spot (correction?) we are
now trying to put behind us.
The only 2011 drop of VIX below 15, on
21 April, coincided with nearly a 2% gain in the S&P that occurred over April
20th and 21st.
So it looks like we need to get a VIX
reading consistently below 15 if we are to go much higher on the S&P. That didn’t happen all through 2010 or 2011,
but it is certainly possible for the VIX to go lower. VIX bottomed below 10 late in 2006 preceding
the peak in the S&P 500 in mid-2007 by about 6-months.
Bottom line: if VIX gets below 15 and
continues falling, we should see the S&P continue its upward trend; if not,
we are at, or very near, the Top and I think we will see another correction. There is a volatility index for other Indices
as well so be sure to follow the correct one - S&P VIX.
Today’s move was encouraging and it
appears to me that the nail is in the coffin for the correction; we can declare
it over! Those sorts of pronouncements
usually aren’t smart, but let’s go for the drama today (if the market falls off
a cliff tomorrow I’ll just call it a new correction). This prognostication assumes the VIX confirms
our thinking!
Conversely, today was a statistically
significant day (it exceeded our statistical parameters of price and volume)
and we could see some down-days near-term.
Even so, I doubt that we will get below 1305 in the near term and the
damage should be confined to less than 5% if it occurs at all. Actually, I expect others will be encouraged
by today’s action and we should see the S&P moving up on higher
volume. Then we will be even more
convinced the correction is over.
NTSM switched to BUY on 20 April. NTSM
analysis is a HOLD today, but indicators improved. I remain 50% invested in stocks, but I will
move to 100% invested in stocks sometime this week, hopefully, buying on weakness. This all assumes NTSM doesn’t change its mind
and switch to Sell.
