Saturday, December 10, 2011

$VIX - The Bigger Picture


UPDATE: Dec. 29th, 2011

Something interesting is developing in the ratio as can be seen if you visit the live and updated version of the chart.  The original blue down-sloping trend line (as seen in the static chart below) was breached to the upside but the ratio appears to have stalled before even reaching the more dominant one.  Perhaps the S&P 500 has reached another (and lower) peak as priced in VIX units and is about to head lower.  If that's the case, equities are about to continue lower.  It also appears that the VIX may be putting in a new higher low which would also be a very bearish development for equities.

ORIGINAL POST

I'd like to show you a chart which was included in an article that I wrote on the $VIX back in June. I don't show it for any particular reason other than to show that it's behaving pretty much as I suggested it would back in early summer.  At the time, I didn't know why the $SPX:$VIX ratio behaves in the manner that it does, only that it does. But neither did I need to know why because in the purest form of TA, as long as we can see a meaningful relationship that reveals information, we can work with it.

                                                            Click here for a live and updated version. 

The bottom line is this: as long as the ratio between $SPX and $VIX is falling, equities are heading lower relative to $VIX. In other words lower,  Period, lol. At the present time the ratio is still suggesting equities are likely heading lower. But admittedly, it's still entirely possible that the investing world is going to buy into the notion that the European debt crisis has been solved (YAY!) and the S&P is now headed for new highs.  Perhaps to 1666 before Santa gets here.  In that case, this ratio will spike much higher. I seriously doubt that
happens, but hey... that's what the chart is for. We'll see what's in store in the weeks ahead, but I expect this ratio will likely be stopped at the down-sloping trend line and then to continue to tumble big time.

I was pleasantly surprised to see what John Lounsbury wrote once he'd seen the article that chart came from. From the "for what it's worth" files: John Lounsbury's Opinion

However, even though I didn't understand why the $VIX behaves as it does, in one of the best ironies I've seen in a long time, the very same week another article was published that explained the "why" of it all. It was the best accidental marriage of any two articles one could expect to see. That second piece was written by Shah Gilani and is bar none the best article I've ever read on the $VIX. Since so many investors focus on the $VIX and believe they can take clues from it, I definitely put this article in the "must read' category. I've posted this link numerous times, the latest being not all that long ago. So if you've already read this article, please forgive me for suggesting it yet again. For those who *haven't* read it, I respectfully suggest you do.  NOTE: For reasons unknown, this link might open with a page which suggests it is private or hidden.  It is not. Simply click the link that says "bypass this message": Shah Gilani's Article

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20 comments:

  1. Am I in the right place?
    I heard there were free babes & beer here?
    (G'day from Downunder dude. Don't let the bastards get you down -
    DK

    ReplyDelete
  2. Hi there stinky. Nice to see you check in. I knew you would. Sorry man, but I can't put up with the bastards. Quite often I want to chip in with something valuable, like for example, when I see a few commenters getting all worried about BullTart's 10/80 weekly cross. I have some pretty pertinent information about that situation and would like to offer some key price levels that my little program can calculate. I put a lot of effort into a detailed comment, then 'poof', the god damned then vanishes. Only on Danno's site does that shit happen. And the anti-Canadian sentiment by two or three assholes over there is just tolerated by everyone else. Not by me god damnit. WTF is wrong with Canadians? As if we were a country full of god damned Bulgarian Nazis or something.

    Yeah, keep checking in dude. We can talk currencies here to your hearts content if you like. The biggest problem though is that the comments won't thread properly if we reply to someone. Second problem is that links cannot be made 'active' on this format. If you post a link to a chart, anybody wanting to see it would have to 'copy and paste' your link. That's a real pain in the ass. I might have to change bloghosts.

    Anyway, it's god damned peaceful here. That's far more important to me than a room full of friends that's been overrun by juvenile delinquents... AND TOLERATED by the majority. That's just not an atmosphere for me. If that room is going to tolerate the trolls, then screw the whole bunch of 'em.

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