Is The VIX Flashing A Buy Signal?

By: Chris Ciovacco | Fri, Mar 16, 2012
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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).

$VIX (Volatility Index - New Methodology) INDX

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.

 


 

Chris Ciovacco

Author: Chris Ciovacco

Chris Ciovacco
Ciovacco Capital Management

Chris Ciovacco

Chris Ciovacco is the Chief Investment Officer for Ciovacco Capital Management, LLC. More on the web at www.ciovaccocapital.com.

All material presented herein is believed to be reliable but we cannot attest to its accuracy. Investment recommendations may change and readers are urged to check with their investment counselors and tax 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 or recommended 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. THERE ARE NO WARRANTIES, EXPRESSED OR IMPLIED, AS TO ACCURACY, COMPLETENESS, OR RESULTS OBTAINED FROM ANY INFORMATION CONTAINED IN THIS ARTICLE.

Ciovacco Capital Management, LLC is an independent money management firm based in Atlanta, Georgia. CCM helps individual investors and businesses, large & small; achieve improved investment results via research and globally diversified investment portfolios. Since we are a fee-based firm, our only objective is to help you protect and grow your assets. Our long-term, theme-oriented, buy-and-hold approach allows for portfolio rebalancing from time to time to adjust to new opportunities or changing market conditions.

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