How High Can the VIX Go?

Well at least we saw some volatility! And yes I understand that now that we've gotten some volatility folks want to know how high can the VIX go? Spoiler alert: I don't know.

Here's what I do know: I believe the VIX over the next few weeks will be more lively than it's been. I mean it's already backed off a point and a half just through the trading day. But because the overbought condition is of an intermediate term one I simply expect there will be more volatility as we work off that overbought condition. So even if the VIX backs off Friday and/or Monday, I don't expect the volatility is done quite yet.

One reason I don't is sentiment. The American Association of Individual Investors this week showed a big surge in bullishness, up 8 points to 40% while the bears slumped to 22.8%. The Bulls were last here in early November which as you know gave way to more than one down day in the market. The Bears were last here in mid June 2018 when we saw the S&P correct from 2,800 to 2,700 over the ensuing two weeks.

Another reason is because the put/call ratio was 99%. Consider this: last Friday it was 113%. Folks were more concerned last Friday than they were on Thursday. Let me remind you that last Friday the S&P was up 2 points on the day.

Then there is breadth. For the most part it was in line with the decline in the market. But let me point out that nine trading days ago (January 28) the S&P was down almost 21 points on the day and net breadth was terrific at -330 on the day. Thursday the S&P was down 25 and net breadth was -1,130. That's a change.

As I noted yesterday breadth is now to be watched closely because where two days ago it would take a net differential of -3,500 advancers minus decliners to halt the rise in the McClellan Summation Index, as of today it requires only -700 issues. That cushion is shrinking fast.

I continue to expect volatility to rise in the coming weeks.

Away from the market, bonds have been on a tear lately. We looked at the chart of yields on the 10 Year recently, noting that if they came down to the line at the 2.6% area and the Daily Sentiment Index (DSI) got extreme I would look for bonds to sell off again (rates to go up). We had a small boost in rates but are now back down. The DSI is back to 78 on the bonds. If this yield gets down to 2.6% I'd expect sentiment to get extreme again.