Another Friday of Testing VIX Lows?

Since Fridays are days in which recent VIX lows are often tested, I thought this might be a good time to step back from the typical VIX daily chart and look at a weekly chart. In the chart below, I have elected to go back to the beginning of 2006 to capture the details of what was arguably the lowest volatility year on record so it could be compared with the most volatile year we have witnessed, 2008.

While volatility first began to spike in February 2007, it was not until July 2007 that investors began to come to terms with the potential magnitude of the damage should the subprime mortgage crisis morph into a global financial contagion. From July 2007 to September 2008, volatility was elevated, but seemingly contained in the 16-35 range represented by the blue box in the chart. It just so happens that the midpoint of that range roughly coincides with the 2006 VIX high of 23.81 that is represented by the horizontal green line.

To complete the picture, I have added a dotted green trend line that connects the December 2006 low to the May 2008 low. Like the 2006 high and the median for the blue box, it projects to about the 24-25 range.

This is not to say that the VIX cannot go below 24-25, but given the 3.06% drop in the SPX on Monday and the 2.14% gain yesterday, the current 26.65 level in the VIX does seem inconsistent with recent single day volatility.

[source: StockCharts]

Disclosure: Long VIX at time of writing.

Comments

[Brian Benda:]

Bill, in addition, the rate of change on the VIX is divergent and failing to confirm the continued drop. As you are aware, ROC and RSI and other calculations of price velocity do not signal precise tops and bottoms, but rather give a general indication that such an extreme is likely approaching. For instance, the same (but opposite) divergence was present when the VIX was shooting up to 90 in October. The current divergence has been playing out since 04/17 when the VIX dropped below 35 for the first time this year. The divergence is starting to become more pronounced now. I agree that the VIX could drop to 24-25 near-term before basing and heading higher again for a period of time, and this kind of scenario would play well into the VIX seasonal cycle you wrote about the other day. Please keep up the excellent work!

Jun 26 05:30 PM

[Reelken:]

I religiously read every post on SA. This is one of very few comments I have ever made on SA, but I figure it's about time.

Bill, I regularly look forward to your articles. I find way too many of the other authors posts are just emotional opinions, nonsense, propaganda or childs play.

You are one of the very few that actually and consistently provides objective data that can increase knowledge and returns. Keep up the good work

Jun 27 08:45 AM

[hound:]

Bill,
Very interesting observations. Thank you for bringing this out. In your opinion, how does the recent low volume across the board factor into your equation?

Jun 27 09:45 AM

[Market Sniper:]

Bill, superb work, keep it up! As a side note: VIX is now at the same level as Sept 12th. Also a Friday, before the Lehman BK weekend.

Jun 27 03:09 PM