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

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

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.