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Volatility (VIX) Hits 3-Month Low – Big Decline in Equities Ahead?

by Brett on August 2, 2010

Today, the volatility index (VXX) hit its lowest level in 3 months.  Does this mean we have a large stock market decline in our future?

Over the last 6 months, lows in the VIX have corresponded with tops in stocks.  Since May’s spike, it’s been a series of lower lows and lower highs for the VIX:

Volatility VXX Price Chart August 2010

S&P 500 Price Chart August 2010 Volume

Source: StockCharts.com

Also supporting our bearish case is the declining volume in this leg of the rally, as noted in the chart above.

Calling a short term top is difficult if not impossible – but what the hell, let’s have some fun with it.  A declining VIX, declining volume, and a general overbought/bullish condition would lead me to guess that we should be in for some sort of decline pretty soon.  If/when this occurs, the breadth and magnitude of the sell-off will be interesting to watch.

So for now, we are maintaining our current S&P 500 short position.  This particular trade has been a loser thus far.  But we shall see what the rest of the week has in store for us.


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Tagged as: stock market volume August 2010, Technical Analysis, vix, VIX August 2010, VIX price chart, VIX S&P 500 relationship, volatility, VXX

  • Adrian Lopez

    http://markettimingresearch.com/FactorSeasonals/2010/07/dow-up-or-down/

    Long term, we don’t see how the US can escape a double dip recession. In fact, it really hasn’t left the “first recession” with unemployment at record rates. And now that census takers are being left off, retail is off, commercial real estate is off (the malls are empty) because consumers aren’t spending, new home sales are off (so don’t expect a boon in construction workers any time soon), the BP Oil spill will hit the coastal states, … frankly with all this true BAD news I don’t see where the recovery lies.

    Nevertheless, the market CAN do some crazy things…for awhile until reality catches up. Here’s the best seasonal forecast of the DOW we can provide at present.

    This chart does suggest a fake rally and dip by month’s end, then rally into August. By cycles analysis, August 6-13 could see a mini-top in the market, and then a decline, so stay tuned to your MACD signals or trendline breaks for signals. A long term moving average would be much too slow for what we expect.

    http://www.consumerindexes.com/
    Trailing Days: 91-Day 183-Day 365-Day
    % Growth(4): -3.88% -2.75% -0.30%
    Percentiles(5): 4.02% 3.69% 8.96%

    Good look with your short position, I’m shorting the market too with FAZ.

  • Pingback: Why Richard Russell Disagrees With Robert Prechter’s Predictions: August 2010 — The Contrary Investing Report

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