Is a Jumpy VIX Trying to Tell Us Where the Market Is Headed Next?
If we were to analyze the VIX like a stock, we’d be buying it here. And that’s not good for the stock market. Here’s why.
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For the last few months, my biggest complaint has been sentiment. I have said it is very complacent. I think last week’s action has taken some of that complacency off the table, but not all of it.
Recall a couple of weeks ago how I explained that the Daily Sentiment Indicator on the VIX was 14, so if the S&P rallied much more, the DSI would fall to single digits. The phrase I used at the time was that it makes the rally’s runway short. I am here to tell you that with the VIX now at 21, the DSI for the VIX is at 37. That’s a much better runway than when it was at 14.
But now I’d like you to take a look at the chart of the VIX. If this were a stock you’d buy that base, wouldn’t you? Or at least you would want to.
I have always used the phrase a jumpy VIX when I discuss one of the sentiment indicators I would like to see to show me sentiment has changed. It is very subjective, but I will try and explain what I mean. I want to see a base, such as we see now, that breaks out. A chart that looks like every chart reader in the world would want to jump aboard.
Take a look at that blue line from earlier in the year. Notice the way it ‘broke out’ in March. Then one day shortly thereafter the VIX traded up to 35 and reversed. That is the kind of action I am talking about; that is when the VIX looks jumpy. A VIX that breaks out and gets jumpy would probably also take that current DSI reading of 37 on the VIX and shoot it even higher, giving the market a longer runway for when it gets back to oversold.
As a reminder, the DSI is on a scale of zero to one hundred. Readings over 85 are yellow flashing lights (over 90 and it’s time to sell). Readings under 15 are yellow flashing lights (single digits, and it’s time to buy).
About a week ago, the DSI for oil got to 90, and it was time to sell. As you can see from the action over the last week, it is not always an immediate response, but it tends to work. We also saw the DSI for bonds get to 9 in mid-September. That took two weeks before it mattered.
Let me finish by noting that the DSI for the S&P is down to 37. Nasdaq is down to 35. That’s still quite far away from ‘buy’ levels, but we have not seen readings under 40 in months. So yes, sentiment is shifting.
The best way I know to get sentiment to change fully and fast is to have no more hidey-holes in the market. I don’t know if we can break the grip of the Either/Or Market, but breaking it would be a plus, not a negative in my view.
