VIX Pattern Suggests 2003 Repeat

The VIX is designed to gauge investor fear, the brake half of the two pedals that drive the market (the other being greed). It's interesting that the braking pattern displayed as we came out of the last downturn in 2003 is being replicated now. The VIX 20 level (see my article "Is VIX 20 Important?") has served as the line dividing gyrating bear years from stable bull climb years. Over the last couple months, we have approached this line and met up with the major resistance that resides there. This is what happened in 2003: (click to enlarge)

The VIX went swiftly to the battle zone near 20 and churned there for 5 months. This formed the megaphone formation (widening channel) typical of intense bull/bear battles. The widening swings finally went in favor of the stable bull market years. This is what the VIX is doing now:

It looks like the same intense bull/bear battle raging at Battlefield 20. The winner will likely drag the loser out of the megaphone either to VIX 15 or VIX 40.

This might at least partly explain the divergent numbers we are seeing in the risk and sentiment tabulations lately. In the Nov. 2 online.barrons.com presentation of the UBS Global Equity Strategy Risk Indicator, we see a mad dash to risk appetite:

Bur meanwhile, the Nov. 4 AAII Sentiment Survey shows only 22% bulls and a whopping 56% bears vs 39% bulls and 30% bears long-term average. And the bulls and bears seem quite fickle. The "change from last week" figures were bulls -11% and bears +13%! The picture being painted by all this is the investing herd becoming more agitated but not really knowing which way to stampede. Not a comforting thought. Let's hope they wind up at VIX 15 again.

Disclosures: None