Everyone, including us, has referenced the VIX or Fear Index's current low level as a possible point of concern for an imminent reversal in stocks. We remain concerned about the VIX. However, a bullish case can also be made based on history.
Can the VIX drop further? You bet it can. The VIX hit a low of 10.03 in 2007, which means it would have to fall an additional 35% to reach the 2007 "historic low". The VIX also dropped to 9.31 in 1994, which would require an additional drop of 39% from current levels.
When the VIX falls, it indicates fear is subsiding or tailing off. Are there periods where it makes sense to have a reduction in fear? Sure. The current argument would be the market (right, wrong, or indifferent) feels the systemic "Lehman-type" event has been taken off the table due to the European Central Bank's unlimited three-year loans. If the market turns out to be right, then it would be logical for the VIX to drop and for stocks to rise.
The weekly chart below shows the VIX, the VIX's 200-week moving average (MA), and the S&P 500 Index (bottom). In mid-2002 the slope of the VIX's 200-week moving average began to tick down, which is very similar to what happened in early 2011. In 2002, stocks dropped quite a bit further before the VIX's 200-week moving average started to tick down again in 2003 "“ very much like what we experienced in 2011 and are now seeing in 2012. From the period where the slope of the 200-week turned down (2003) to where it turned back up (2007), the S&P 500 gained 55% (period between green and red vertical lines).
Does this analysis negate all the bearish interpretations of the current VIX? Absolutely not, but it does give us some balance and perspective based on observable evidence (the slope of the 200-week MA). From a bearish perspective for stocks, the slope of the 200-week above has not turned down yet in a convincing manner, but it has the look of trying to roll over.
Another fair question to ask is "“ "Do the big picture technicals support further gains or an imminent crash?" The answer, whether we agree with it or not from a fundamental standpoint, is "further gains". We believe the systemic risk in the financial system remains elevated and needs to be respected. However, it does not matter what we think "“ it matters what the market thinks. As long as conditions remain favorable, we will participate, but with a skeptical and watchful eye.
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Copyright © 2010 Ciovacco Capital Management, LLC. All Rights Reserved. Chris Ciovacco is the Chief Investment Officer for Ciovacco Capital Management, LLC (CCM). Terms of Use. This article contains the current opinions of the author but not necessarily those of CCM. The opinions are subject to change without notice. This article is distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. The charts and comments are not recommendations to buy or sell any security. Market sectors and related ETFs are selected based on his opinion as to their importance in providing the viewer a comprehensive summary of market conditions for the featured period. Chart annotations are not predictive of any future market action rather they only demonstrate the opinion of the author as to a range of possibilities going forward. All material presented herein is believed to be reliable but we cannot attest to its accuracy. The information contained herein (including historical prices or values) has been obtained from sources that Ciovacco Capital Management (CCM) considers to be reliable; however, CCM makes no representation as to, or accepts any responsibility or liability for, the accuracy or completeness of the information contained herein or any decision made or action taken by you or any third party in reliance upon the data. Some results are derived using historical estimations from available data. Investment recommendations may change and readers are urged to check with tax and investment advisors before making any investment decisions. Opinions expressed in these reports may change without prior notice. This memorandum is based on information available to the public. No representation is made that it is accurate or complete. This memorandum is not an offer to buy or sell or a solicitation of an offer to buy or sell the securities mentioned. The investments discussed in this report may be unsuitable for investors depending on their specific investment objectives and financial position. Past performance is not necessarily a guide to future performance. The price or value of the investments to which this report relates, either directly or indirectly, may fall or rise against the interest of investors. All prices and yields contained in this report are subject to change without notice. This information is based on hypothetical assumptions and is intended for illustrative purposes only. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. CCM would like to thank StockCharts.com for helping Short Takes create great looking charts Short Takes is proudly powered by WordPress . Entries (RSS)
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Copyright © 2010 Ciovacco Capital Management, LLC. All Rights Reserved. Chris Ciovacco is the Chief Investment Officer for Ciovacco Capital Management, LLC (CCM). Terms of Use. This article contains the current opinions of the author but not necessarily those of CCM. The opinions are subject to change without notice. This article is distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. The charts and comments are not recommendations to buy or sell any security. Market sectors and related ETFs are selected based on his opinion as to their importance in providing the viewer a comprehensive summary of market conditions for the featured period. Chart annotations are not predictive of any future market action rather they only demonstrate the opinion of the author as to a range of possibilities going forward. All material presented herein is believed to be reliable but we cannot attest to its accuracy. The information contained herein (including historical prices or values) has been obtained from sources that Ciovacco Capital Management (CCM) considers to be reliable; however, CCM makes no representation as to, or accepts any responsibility or liability for, the accuracy or completeness of the information contained herein or any decision made or action taken by you or any third party in reliance upon the data. Some results are derived using historical estimations from available data. Investment recommendations may change and readers are urged to check with tax and investment advisors before making any investment decisions. Opinions expressed in these reports may change without prior notice. This memorandum is based on information available to the public. No representation is made that it is accurate or complete. This memorandum is not an offer to buy or sell or a solicitation of an offer to buy or sell the securities mentioned. The investments discussed in this report may be unsuitable for investors depending on their specific investment objectives and financial position. Past performance is not necessarily a guide to future performance. The price or value of the investments to which this report relates, either directly or indirectly, may fall or rise against the interest of investors. All prices and yields contained in this report are subject to change without notice. This information is based on hypothetical assumptions and is intended for illustrative purposes only. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. CCM would like to thank StockCharts.com for helping Short Takes create great looking charts Short Takes is proudly powered by WordPress . Entries (RSS)
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