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:
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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