Monday, July 14, 2014

VIX:VXV Ratio Pointing to a Near Term Market High?

Click on Chart to Enlarge

This chart of the VIX:VXV ratio goes back 3 years, and represent 1 month implied volatility over 3 month implied volatility.  If you have no back ground in this ratio, then search this blog for the VIX/VXV label to get past interpretive info.

What I want to point out here is that when the ratio spikes to a LOW level - meaning below the lower bollinger band - that event has consistently NOT been right a market high.  I discussed this briefly several weeks ago at the end of May.  Looking back over the lats 3 years of chart history, we see that the low in VIX:VXV occurred 6, 4, 8, and 6 weeks before the most significant market corrections, though in March 2012 it was only about 2 weeks until the high, but 6 weeks until a small double top before the correction really occurred.

So averaging those out we see that it has been about 6 weeks after the low VIX:VXV that prices made a high and corrected for several weeks.  Interestingly, we are currently right at 6 weeks from the most recent low in the VIX:VXV.  So based upon this very simple analysis, it gives us a heads up from volatility analysis of real money data in the options market, that we may be in the time frame for the market to peak and correct here.  Additionally, as of today we have a very sharp bearish divergence on the daily time frame in QQQ and other than the Dow managing to poke up to a slight new high, the other indexes like Russell 2000, S&P 500, Nasdaq Composite, Wilshire 5000 are not making new highs, so we have some non-confirmations and technical bearish divergences present.

Also recently we saw a extremely low equity put/call ratio average.  Similar comments apply there as to the VIX/VXV.  The low point in the equity put/call ratio has been a couple weeks to a couple months prior to the price peaks before the major corrections.  Currently we have a June 19th low in the 10 day average of the equity put/call and are nearly 4 weeks removed and price pushing to higher highs.

Taken together, my opinion is that the market is set-up virtually identically to the sentiment backdrop that has occurred right at the highs before recent market corrections.  So, only time and market action will tell whether the recently consistent tendencies will follow here, my vote is that there is unlikely to be any appreciable price rise from this level over the next several weeks, and we could very well experience another broad based correction in stocks.

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