Bad Omens from the VIX

The VIX has been on a strong upward trend since the beginning of September. On Tuesday, it closed at a level not seen since the days immediately before and after the crash of 1987. Only 17 days in that period recorded volatility readings higher than what we have now.

The strong upward trend gives the VIX an ominous profile: There is no firm analysis that we can apply to suggest or guess at where the VIX might top out.

As trend-followers know, trends can continue far longer and far stronger than anyone expects. When such trends are in play, we typically look to buy the dips. Assuming the VIX dips when the market rallies, we should be looking to either sell the rallies and/or buy puts.

In July, I made a historical comparison between the T2108, the percentage of stocks below their 40-day moving average, and the VIX. At that time I concluded that a climactic bottom on the S&P 500 can occur when the VIX is "close enough" to the last climactic bottom. Tuesday, the T2108 was already about as low as it can go at 2.26%, and the VIX was almost double its closing high from July.

So the conclusions from that piece failed for this selling cycle. T2108 is at levels not seen since the October 1987 crash. Only 10 days in that period recorded lower levels. Recall that when T2108 goes below 20%, the market is considered oversold.

With the VIX trending upward, and the T2108 already spending seven straight days below 20%, we have the classic situation where oversold just gets more oversold. That is, the market is having trouble finding support from which to bounce. A very ominous demonstration of weakness. So what is the biggest technical difference between now and 1987? The stock market was soaring before the October, 1987 crash…

Comments

[Dr. Duru:]

See the complete article here (including charts): www.drduru.com/money/0...

2008 Oct 09 05:58 PM

[CLH:]

As in 1987 the Vix is topping --pointing to the end of the present crash. Time to buy

2008 Oct 10 11:17 PM