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A Different Look at the VIX Shows New All-Time Lows (and Trouble for S&P 500)

Sometimes it takes a different look at an old and stale indicator to squeeze out some additional insight. A look at a price adjusted VIX (compared to the ‘good old VIX’) may do just that.

Here’s how the VIX has become old, stale, and almost useless:

On March 14, 2013 the VIX dipped as low as 11.05 (the lowest level since 2007) without any negative effect on stocks. For much of 2013 the VIX (VXX) was stale and lethargic, spending much of the year below 13.5.

As such, it was stripped of its ‘stock market top sniffing’ abilities and became worthless like a drug detecting dog with a burned out snout.

For much of 2013 the VIX traded at the same level as in 2007. But in 2007 the S&P 500 hovered around 1,500 compared to 1,800 in 2013.

If the S&P is 20% higher, shouldn’t the VIX be 20% lower?

The VIX, as we know it, does not adjust for the price of the S&P 500 (SPY). It does not have to, because the VIX projects the expected percentage movement of the S&P 500.

Nevertheless, the three charts below plot the S&P 500 against a price adjusted VIX (PA VIX) at different time frames.

The price adjusted VIX is simply calculated by dividing the VIX against the S&P 500 (VIX/S&P 500).

The first chart provides a big picture look at the difference between the VIX and PA VIX in correlation with the S&P 500.

View enlarged VIX / S&P 500 charts here

The differences are subtle, but noteworthy:

  1. Since 2013 the VIX has been in a net sideways range, while the PA VIX has been in a slight down trend.
  2. The PA VIX is near all-time lows, while the VIX is above its 2007 lows.

The second chart highlights the 2006 – 2014 timeframe.

The third chart zooms in on the very recent PA price history.

The PA VIX is not a miraculous new indicator, but it shows that – when taking the S&P 500’s price into consideration – the VIX is very near an all-time low.

As a contrarian indicator, the VIX (XI.V) has turned into a broken clock that – after many wrong signals - will be right eventually. The PA VIX is telling us that now isn’t the time to be complacent.

The April 2 Profit Radar Report warned of complacency when it stated that: "There's a bullish technical S&P 500 breakout, but a number of indicators suggest this will end up being a false breakout."

In fact, there is a very simple ‘indicator,’ which predicted the last several false breakouts and S&P 500 pullbacks.

A visual of this indicator is available here (make sure to take a look at the date!):

S&P 500 – Stuck Between Triple Top and Triple Bottom

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

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