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VIX Proves It's All Relative


Indicator means something different now than six months -- or three years -- ago.

Editor's Note: This content was posted on the Buzz & Banter. It's being published here for the benefit of the Minyanville community.

Okay, I'm upgrading my opinion of the VIX from "not telling as much right now as people think" to "bullish."

Yes, bullish. That doesn't mean I'm bullish, per se. But if there was one indicator in the world, and it was the VIX, and you forced me to go on Bubblevision and opine on the market based on that one indicator, I'd say I'm bullish.

The VIX was created as a way to gauge fear. Higher VIX means higher fear. And if there's too much fear, then that's something you should theoretically fade. That is, get long.

It's far from perfect. And it's somewhat subjective. And not beholden to absolute values. A 29 VIX now means something very different from what it did 6 months ago (wherein it would have signaled extraordinary complacency) or 3 years ago (extraordinary fear).

So how does VIX 29 stack up now?

Well it's very high, relative to Historical Volatility of the SPX/SPY. Ten-Day HV is currently near ten, and has basically gyrated between ten and 20 for the past month.

Its high, relative to itself. One of the more popular indicators is the "10% away from the Ten-Day Simple Moving Average" study. The theory is that if the VIX deviates above (below) its Ten-Day SMA, it's overbought (oversold) and bullish (bearish) for the market. It closed yesterday about 14% above the Ten-Day. That's bullish. But in all fairness, this indicator failed spectacularly in 2008. Of course in 2008, everyone actually used overbought VIXs as reasons to get bullish into the implosion.

Personally, I prefer using this indicator backward. I want to see how the market acts when this "triggers." We're overbought in the VIX now; if the market stabilizes/rallies off it, it's telling me this move the last few days is a pause in the rally.

How about subjective? There are, of course, reasons why volatility can be objectively high relative to the world around it. There could be news expected -- think of a company ahead of an earnings report.

Do we have such a scenario now, where the VIX should shoot so far ahead?

Well, if we do, it's not readily apparent to us mere mortals. The Smart Money Police have seized on this VIX as reason to expect a market melt. You'd need a series of days like yesterday to even justify VIX in the the low 30s. And 2% moves are still way the exception.

My personal opinion is that too many are positioning themselves for Fall Implosion 2.0. I'm not at all a believer in the whole Green Shoots nonsense, but at the same time, I really don't think the market caves while too many seem to anticipate it.

But who really cares. I'm an options and volatility trader -- I don't do macro calls. Right now, I believe volatility is too high, and I'd like to net sell options and defend the sales. That's my basic plan.
No positions in stocks mentioned.
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