Last Monday we discussed our thoughts on that day’s second half “blame game” as the market reversed bearishly lower during the second half following a rousingly pleasant out-the-gate start. Pundits quick to point fingers noted the typical credit market suspects and convenient, reignited and tied at-the-hip concerns. Our view on that day’s bulls positioning themselves for a Pamplona style event, was to simply focus on the root cause of those summoned anxieties by looking at the CBOE Volatility Index ($VIX) for early clues into the shift in investor sentiment.
Recalling the action on June 11, the market’s sometimes euphemistically called Fear Gauge reversed higher after a narrow undercut of 20% and 50SMA support and test of the lower Bollinger Band as the index stretched a bit more than the typically worrisome 15% threshold relative to its short-term, mean-reverting 10SMA.
All told, with the writing on the wall or the tea leaves drawn on our charts indicating complacent levels of confidence, the action was good enough to send the SP-500 off about 1.25% after being up by about 0.75% and good for a somewhat nasty round turn of 2.0%. A bit more than a week later and we hate to say it, but investors once again appear too brash in front of this afternoon’s FOMC decision and look set to go through that normalization of emotions process in order to counter a bit too much short-term bull.
Figure 1: CBOE Volatility Index ($VIX) Daily (courtesy of TC2000).
As we wrote in our prior piece, there are no absolutes or guarantees in the market. But in our years of seeing traders turn from bull-to-bear and vice versa; watching the VIX for clues to pending turns in the market is a solid contrarian tool which does manage to get it right much more often than not.
Similar to the last go-around, with sentiment complacently stretched short-term some 18% below the 10SMA and prices hitting six week lows while reversing outside of its lower Bollinger Band; there’s good reason to be cautious. Further, the Fear Gauge is now offering even less scary i.e. cheaper opportunities to affordably hedge downside market exposure at historically fair levels in the high teens. That said, waiting to decide if Operation Twist turns into a “sell the news” event or otherwise and without protection in place; makes little sense and could cost a good deal more cents than not when all is said and done.
Senior Options Writer, former Market Maker & fulltime Option Hedge Hog Advocate
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The information offered here is based upon Christopher Tyler’s observations and strictly intended for educational purposes only, the use of which is the responsibility of the individual.