SPX:VIX Ratio Daily Chart Signals Markets At or Near a Significant Top
The large drop in the VIX indicates complacency in the markets. Traders have capitulated to the fact that the Fed will always be there to save the day. In addition, there was very little worry over the fiscal cliff, traders now accept the Washington dysfunction, and fully expect all negotiations to run up to the final hours, then a solution will be announced. Thus, no worries there either. There are rumblings that earnings will disappoint but the negative announcements outpaced the positive announcements by three to one, thus, the bar is significantly lowered again, so even Grandma Edna can step over in her orthopedic shoes.
The SPX:VIX ratio has now surpassed the highs that signaled the September-October market top. The red circles show significant market tops and the green circles show significant market bottoms. All major tops over the last two years were identified by the ratio moving above 85; the February 2011 top, the May 2011 top, the July-August 2011 top, at the time of the last debt ceiling debacle, which created the waterfall crash, the April-May 2012 top, the September-October top, and ..........now. Note that August 2012 printed a high ratio number which resulted in a market sell off but that all occurred at the time of the ECB announcing the OMT and the Fed announcing QE3 Infinity. The point is that although the markets are at a top, the top may roll over tomorrow, or it may roll over in February, or anytime in between. The chart simply says the top is here or very very close.
The red line is Keystone's 68 bull-bear line in the sand that signals major market trouble, which occurred in the spring 2011, August 2011 and May 2012. A week or so ago the 68 failed which had bears throwing confetti but alas, the bulls reversed markets to the upside on the fiscal cliff positivity with the rocket launch. Projection is that the broad indexes are now at a significant market top and should roll over at anytime over the next month. Thus, SDS would be a buy.
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"The large drop in the VIX indicates complacency in the markets."
That's a fundamental mistake that most make. The drop in VIX is actually a result of government agencies selling VIX futures in order to boost the market, not due to complacency. At least, that's what I've read.
"That's a fundamental mistake that most make. The drop in VIX is actually a result of government agencies selling VIX futures in order to boost the market, not due to complacency. "
Whenever the VIX plunges, stories circulate about why it's different this time. I doubt it is.
Most of the online literature so far this week is still about the low VIX being bearish. My take on these things is there's a process that starts with a VIX implosion, then a lot of chatter about how it signals an imminent decline in the market and spike in the VIX, then the VIX goes even lower and chases out those who got in because of these headlines, then a lot of chatter about how "the VIX doesn't matter anymore" (some of it similar to your post), then the VIX reminds everyone that it does matter and explodes higher.