VIX Tops 50 for First Time Since Mid-December

With the SPX failing to find support at 850 and financials falling another 6% this morning, the VIX has spiked all the way to 51.03, up 17.9% so far today and up 32.3% from just six sessions ago.

Since the large gap down at the open, today’s action has been more of a slow grind than a sharp panic, suggesting that there could be a fair distance still to the down side (click on chart to enlarge). SPX support may come in the 820-830 range, but if those levels fail to hold, the possibility of a drop back down to 740 suddenly looms large.

Comments

[Moon Kil Woong:]

It is good to see VIX rise to more normalized risk levels in this market. I was wondering like you were how long Vix could remain at abnormal levels compared to the risk I think everyone is worried about. After all, volume has been so light I think people are even scared to trade these days.

Jan 14 01:14 PM

[ROLEX18K:]

The unprecedented VIX only once again proves that we are in the unprecedented territory in terms of valuations.
VIX of 90 as was few months ago tells one vey simple thing indeed, the markets are going through transition of valuations and the lower prices for stocks are guaranteed.

Jan 14 01:50 PM

[happysoul77777:]

Vix started to rise when some people start to short financials and take them down. I wonder if VIX can be manipulated.

Jan 14 04:49 PM

[Alex Trias:]

Think of the VIX as any traded asset. The VIX collapsed recently down to it's 200 day exponential moving average. It bounced off that moving average and has run up all the way to the 50 day exponential moving average today. Which acted as resistance. That's bearish, if you're betting on increased prices in volatility options. Especially when the 50 day and 200 day moving averages are downward sloping, and especially when the test of resistance comes on thin volume.
Overall, if the VIX fails to break above the 50 day exponential moving average within the near term, then it is likely to resume it's downward descent - which may or may not benefit equities. If the VIX can spike in a significant way above its' short term moving average, we could certainly see it go far higher from there - which would very likely accompany a significant downward move in equities pricing.

It's too soon to say whether equities are poised to fall off a cliff or not. Thus far, the collapse in equities prices this year has come on very thin volume. Thin volume oftentimes can signal an end to a primary long-term trend, as traders opt for the sidelines, gorged on easy money and content to put their profits in the bank until a new, confirmed long-term trend emerges.

I'm going to say shorting the equities market has been "easy money". Valuation in 2007 was unreasonable, and the fundamentals of the global economy based on nothing more than hot air. That said, it is not usual for a long-term price trend in equities to last much more than 15 years. Adjust the Dow Jones for inflation and for the decline in the value of the dollar, and you'll see we've been in a 14 year bear market. That, combined with the fact that 50% declines in equities prices across the globe is almost as bad as what we saw in the 1929-1932 bear market in the US and other developed nations, it's hard to make a case for "easy money" shorting the equities markets. Hence the low volumes of late.

If I had to guess - and I like to guess - I'd expect a slow, maddening, grind lower as bulls and bears alike exit the markets, exhausted and sickened. Those who've bet their life's savings in SP500 index funds will take 60% losses and vow to never touch stocks again. One or even two generations of investors will permanently exit equities. I'd expect volatility to fizzle and sputter out. I'd expect to be shunned at cocktail parties if I say "Dow Jones Industrial Average". At some point, the most widely followed equities indexes will all break down to fresh new lows on modest volume, but that won't make front page news on any major newspaper. The reason why is that nobody will care because most average folks will have dumped their mutual funds months before. That's how secular bear markets end, and it probably won't be different this time around. I'm interpreting recent news on the VIX and equities markets based on that prediction of mine.

But the next 15 years, though, will probably be a heck of a lot more interesting for equities than the last 15 years. I suppose that's why some of the real value investors out there are staying up late reading quarterly reports and buying up shares.

Jan 14 06:09 PM

[AndrewBaker:]

The VIX and stock valuations are generally in opposition: whilst volatility goes both ways, in practice high VIX tends to mean lower stock prices. I feel that the VIX doesn't move up just on financials, but that they are the biggest worry for folks at this time, and understandably so. There is more out there to be known before we can say we've reached a bottom and can start the long haul back up, and until then volatilty and the VIX will tend to the high side. Whilst it is, widows, orphans and retired people should not play the markets.

Jan 15 02:59 PM