The Volatility Index, known as the Vix, is a projection of future volatility and fear in the market. Over the long run it averages about 18. A move above 20 means risk is building, and a move over 30 indicates higher daily volatility and downside risk. Last Friday the Vix closed at 30.76. Between this and the fact fewer stocks are trading above their 50-day and 200-day moving averages, seems to be confirmation of red flags waving.
Please proceed to The Details for an explanation of the relationships to watch moving forward.
“It is a capital mistake to theorize before one has data.”
Lately, the Vix Index has been rising. Does this rise confirm the red flag warnings provided in recent newsletters? The Volatility Index or Vix is an index calculated from the prices of S&P 500 Index options and is intended to give a 30-day forward projection of volatility. Over the long run, the Vix has averaged around 18. When the Vix is lower than this, it typically indicates there is a lower risk of near-term volatility in the market. However, when the index jumps above 20, it usually means risk is building. In times of market turmoil, such as during the Financial Crisis and the Pandemic, the risk tends to jump rapidly to extremely high levels. The Vix has been nicknamed the “Fear Index.” Notice in the graph below, the rapid and extreme movement of the Vix when markets became unsettled.
Normally, when the Vix crosses 30, markets are experiencing high daily volatility with increased downside risk. Last Friday, the Vix closed at 30.67.
A look inside the S&P 500 reveals “internals” are weak. Only 207 stocks in the S&P 500 are trading above their 50 day moving average.
And only 301 stocks are trading above their 200 day moving average.
The following graph shows the S&P 500 over the past six months. The bottom portion of the graph shows the percentage of net advancing volume. Notice over the past month, downside volume has increased significantly.
And, while market internals remain weak, valuation measures remain stretched to near record highs.
And although valuation indicators are not useful for determining the timing of a market correction, they are very useful for determining the expected long-term return based upon current prices. What the chart above shows is an extremely overvalued market. Once the market turns, it has an enormous drop ahead to return to long-term norms.
The Vix gives investors the ability to monitor real-time expectations for 30-day volatility. Once the Vix reaches current levels, volatility has arrived. And the Vix itself will become quite volatile on a daily basis (the volatility of volatility). The current technical data reveals a market that is extremely uncertain. When certain macro factors are included, such as the Fed’s tapering of QE, inflation, rising debt and weakening growth, it is understandable that the Vix has been rising. The Vix is currently confirming the red flags.
The S&P 500 Index closed at 4,595 down 1.2% for the week. The yield on the 10-year Treasury Note fell to 1.34%. Oil prices decreased to $66 per barrel, and the national average price of gasoline according to AAA dropped to $3.36 per gallon.
© 2021. This material was prepared by Bob Cremerius, CPA/PFS, of Prudent Financial, and does not necessarily represent the views of other presenting parties, nor their affiliates. This information should not be construed as investment, tax or legal advice. Past performance is not indicative of future performance. An index is unmanaged and one cannot invest directly in an index. Actual results, performance or achievements may differ materially from those expressed or implied. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy.
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