Sand Spring Advisors LLC
January 9, 2002
by, Barclay T. Leib
There is of course no perfect leading market indicator, but for the past five years, the CBOE Option Volatility Index (VIX) has been better than most.
When the VIX implied volatility index spiked above 50 last September 21st, you had the makings of a "panic" bottom. And such was the case back in the fall of 1998 as well.
Conversely, when the index compresses in the 20-23% region, you likely have the makings of a market top with too much complacency. Such was the case last February when a 22.05 low on the VIX index correctly marked a market high -- Greenspan's January 2001 rate-cut notwithstanding. Such was the case again in July 2001, when the index made a yearly low at 20 right before the market turned rather nasty again in August and September. Such was the case once again mosty recently as the index dipped into the mid-22 zone over the past few days.
The VIX is certainly not a perfect indicator to measure when a reversal is immediately about to transpire. Is 22.5% cheap enough, or does compression to 20% or even a bit lower have to transpire first? Answering that question can often be tricky. But taken together with what appeared Wednesday to be "key reversal" day in the major market indices, 22.5 is low enough for us to get excited that a reversal is at hand. Indeed, the VIX popped in Wednesday trading back above 23 in a potential volatility breakout.
Put this all down as another "technical" nail in the coffin of current market bulls. The next two nails to be hammered into the bullish mantra will be when the 100-hour moving average of the hourly S&P 500 bar chart is clearly broken (we closed right on top of it Wednesday) together with the 200-hour moving average of the hourly S&P 500. That latter level currently resides near 1148.
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