VIX to VXV Ratio Is Giving a Strong Bearish Signal

I consider the VIX:VXV ratio to be an indicator in the making. Since the VXV is only six months old it is still too early to give it the robust indicator seal of approval, but that doesn’t mean you shouldn’t pay attention to it.

Looking at the chart below (click to enlarge), the only previous time the VIX:VXV ratio gave a bearish signal comparable to the current one was just as the markets were about to move down in dramatic fashion from late December to late January.

At the very least, the bulls should consider some downside protection in the current market environment. I suspect the bears are preparing to pounce very soon. ...

Comments

[Chungst]

You know it's a horrible index at spotting bearish trends when it fails to capture either the MLK / SocGen drop or Bear Stearns scare. In both of these cases, the major indices set trading lows that were not reflected by your VIX:VXV ratio. If it clearly doesn't work (since it fails the common sense test), then you shouldn't use it.

That reminds me, with all the talk about VIX, VXV, etc. I should listen one of my favorite bands, VNV (Nation).

[biochemyst]

I agree! VNV is the way to go. Just a bit surprised to see someone making use of the VNV on this board.

[galewhitaker]

I think the price of oil is going to kill the rally. Neither the Fed nor the Hedgies can control the price of oil. When the oil domino hits the consumer domino and the consumer domino hits the GDP the whole stupid thing is going to come crashing down, way down.

[Molo7]

very interesting

[nayr]

If you can come up with a correlation coefficient I think it would strengthen your case a lot more. It would also allow you to know how and when to use this as an indicator.

Ryan