The CBOE Volatility Index® (VIX) tends towards Jekyll & Hyde behavior with two distinct types of movement:
- Downward drift with mean reversion
- Upward spikes through the mean that eventually calm
For the most part, the VIX sends its time in downward drift mode, but recently it’s displaying signs of fear.
The main image provides a view of daily action for the VIX from mid-1996 to present day. From 1997 through 2003 the VIX regularly maintained readings between 20 & 30 and experienced shorter periods of downward drift. Drift mode is more clear from 2003 through 2005 with movement below a zone of support/resistance at 14.50 – 15.50.
The compressed view displays the downward trend in the VIX since reaching extremes in 2008, with a recent move below the 14.50 level. Given spike-y behavior back in play it seems the extremes we reach and subsequent drift could set the tone for new secular conditions.
This past spring’s high of 26.71 marked the intermediate-term low in the market and pales in comparison to last year’s high of 48 which preceded the September 2011 low. It seems similar modest extremes in this current move would favor an intermediate-term low that once again occurred at a higher level. This in turn may point to an actual change from the secular bear to a secular bull market.
However, it’s possible that excesses were not completely worked out earlier this year. A VIX move to greater extremes and/or an abbreviated period of downward drift could coincide with a new intermediate-term low that is below the June 2012 levels. This would be a first since March 2009 suggesting the secular bear is not quite finished.
A better view of current behavior is displayed in Figure 1 which displays a daily VIX with an S&P 500® Index (SPX) overlay.
Specs for the Chart:
Daily VIX Line Chart (log scale)
Overlay of Daily SPX Line Chart (log scale)
50-day Exponential Moving Average [EMA]
Zone of Support/Resistance from 14.50 – 15.50
4-Day SMA [visible] on 8-day ROC [not visible]
Figure 1: Daily Line Chart for the VIX with SPX Overlay 50-day EMA & Momentum
Another round of spike-y behavior seems to be underway as seen with the VIX extended well beyond the 50-day EMA, an upward turn in that smoothed line and momentum favoring elevated levels for now.
Clare White, CMT
Contributing Writer and Options Strategist
Optionetics.com ~ Your Options Education Site
Questions for Clare? Please visit the discussion board on the homepage of Optionetics.com.