Cart (0)
VIDEOCan the VIX Predict Pullback?
Index is most useful when used as a contrary indicator.
 |
|
But even as the market continued to rise in late May and early June, the VIX became sticky, remaining near 30 even as the 20-day historical, or real, volatility of the S&P 500 declined from 28 to 24 during the past month. This has led some to the conclusion that 30 was an important level that indicated the market was poised for a pullback. Yesterday’s sell-off -- and the accompanying jump of the VIX back above that round number of 30 -- seems to confirm this theory.
Using the VIX as a Predictor
One problem with this thinking is that the VIX is a statistical measure, and it's the result, not the cause, of any market move. Additionally, because it's a statistic, applying technical or charting analysis typically used on stock, isn't very effective.
But this isn't to say the VIX can’t be used as a predictive tool.
Most people tend to use it as a contrary indicator. That is, like most sentiment readings, when it gets relatively high -- an indication of fear or caution -- it's taken as a bullish sign. If it's low -- which is interpreted as complacency -- it's regarded as bearish. The problem with this approach is that the VIX not only can stay low for extended periods -- it was at decade lows for most of 2006 as the market hit all-time highs -- but it can also rise during bull markets, such as during the tech bubble.
Probably one of the best ways to use the VIX as a predictor would be to use it for short time frames, when it doesn't respond as it should to the underlying market conditions.Twitter: @Minyanville/minyanville-markets-2
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
