VIX presents a “Fade the Fear” situation again, as the front month rises markedly faster than the three month volatility VXV. When this condition presents itself, a market usually finds itself oversold and shortly thereafter volatility collapses. That said, the Wednesday close wasn’t the extreme we are looking for, so VIX could push a bit higher.
The chart below shows previous occurrences and the resulting move lower once 1.00 was achieved. Put another way, we could see more downside over the next couple of days. The red arrows on the SPX chart in the lower panel show where the vertical lines intersect and cross the 1.00 level. Projecting trend lines forward, indicate 2350 is one of the first lines of potential support.
Given the potential downside, you may be asking yourself, “what can I do now to hedge my portfolio?” You could either buy an inverse fund like SPXU or buy protective puts on the SPX or SPY. The problem with protective puts should be obvious. As VIX catapults higher and fear overtakes rational thought, premiums rise exponentially. Thus, the chart above illustrates the anticipated end result; a collapse in volatility is expected in the short term.
SPXU is currently at the first resistance level, where VBP is the most pronounced. The histogram (look left) presents a challenge to further appreciation. After the 17.50 level is achieved, resistance to further advances dissipates markedly, leaving the next VBP level and 38.2 Fibonacci overhead.
Weakness in the S&P500 and NYSE spilled over to other indicators, as we see confirmation by way of new highs minus new lows. The NYHL triggered a sell on Wednesday, as price moved through the 50ma during the evening session. Considering where VIX VXV is positioned, we will likely see further punctuation below the zero line today.
SPY reached VBP support on Wednesday, resulting in a (-2.04%) loss from recent highs. By contrast, the last move below the 50ma resulted in a (-3.13%) loss, before VIX VXV hit an extreme level of similar magnitude.
An interesting side note: TICK cumulative is still rising. That can only happen when more stocks are being bought on the uptick versus being sold on the down tick, on a cumulative basis.
While we cannot predict the future, I believe we are close to a bounce. This presents an opportunity, so we will look for evidence that smart money is buying stocks depressed from the recent weakness.
Happy Thursday,
Vinny