The Pros Are Betting on The VIX

While everyone chats about the semis, I would like to take a few minutes to discuss the VIX. Because it has refused to make a lower low. Oh, it hasn’t made a lower low vs last week, but I’m really talking about vs. December and also vs last summer.

Let me preface this by noting that I am not a VIX expert. I don’t even play one on TV. But that is starting to look like a chart that is tired of going down. Not only that, but in the last week, the put/call ratio for the VIX has fallen under .20 twice.

We don’t often see clusters of low VIX readings like that. They tend to be more one-off readings. In the last year, there have been six readings under .20 and none arrived this close together.

I am fussing because the folks who play VIX options tend to be pros. And when pros get persistent in their call buying of the VIX, I take notice. Unlike most of the other put/call ratios, that tend to be contrary, the VIX tends not to be contrary.

I tend to use the parameters of .20 and 1.0. Too many readings under .20, and the pros are buying calls on the VIX. Too many readings over 1.0, and the pros are buying puts on the VIX. For example, in late March, the put/call ratio for the VIX was 1.15 on March 26^th, and four days later on March 31^st it was 1.11. The pros were betting on a lower VIX, which is exactly what they got.

The fact that we’re seeing these two low readings as we head into an intermediate-term overbought condition (next week) helps my view that the VIX should ‘rally’ in the next week or so. I would like it if the Daily Sentiment Index (DSI) for the VIX was a teenager, but alas, with the VIX refusing to tumble for the last few weeks, the VIX DSI remains in the low 30s, with the current reading at 34.

And since everyone remains focused on the Semis, I will simply say they are stretched as they have been for more than a week. I will not catch the top in them the same way I did not catch the exact top in the precious metals a few months ago.

I can, however, tell you that since the semis have tended to ‘be’ Nasdaq lately, the DSI for Nasdaq is currently 80. If it gets over 85, I’d consider that a flashing yellow light. Alternatively, if we see a stock gap up and the next day it gaps down, leaving that day as an island, that would signal the move is done. Otherwise, I’m focused on the VIX.