10/26/10 4:11 PM - The strong rally observed in the last 2 month in the stock market has been accompanied by a noticeable decline on the CBOE volatility index. It is now under it's 200 months moving average. The situation is not critical at all, but a little yellow light should turn on into investors head.
VIX is widely interpreted as Wall Street anxiety with stock markets, and to me, we built last rally on a good dose of optimism. I'm not denying it was justified; the combination of the return of market participants with the end of summer and accumulation of good news showed us not to be too pessimist (I'm personally not a supporter of the double-dip hypothesis). But the little contrarian guy on my shoulder keep disturbing my thoughts with the idea that this rally was too strong to hold.
I'm still optimist about the recovery, but I think profit are about to be cashed and the S&P 500 won't need that much drop a few tens points.There is still major earning releases to come and we could see a "sell-off" effect happens on the market.
VIX shows low anxiety, and this is often when everybody thinks everything is fine that the worst happens. I don't want to be pessimist, but starting hedging positions would not be a bad decision at all. VIX futures are trading around 21 for November and 24 for December, and if traders are willing to pay this price, this is cause they expect some correction.
Disclosure: Marc Dutil has no positions in the stocks mentioned