Wall Street is fraught with misconceptions. Ironically, the one concept most investors and analysts agree on is the most flawed.
Many analysts have gone on record to predict a market crash, because the VIX (XIV) is so low (near 10). This conclusion is completely false.
I know this sounds ridiculous, but look at the facts may change your opinion. The information below was published in the June 16 Profit Radar Report:
Financial Advisor Magazine just published an article titled “Black Swans Love a Low VIX.” Surely if an industry magazine advising financial advisors implies a VIX induced ‘Black Swan’ event, it must be true.
Along the same lines, the Financial Times reports, in a piece titled “Financial markets: Hurrah Before the Storm,” that: “The VIX index (Chicago Options: ^VIX) is near seven-year lows. Like sailors sensing a lull before the next storm, some industry veterans warn of possible trouble ahead.”
Facts vs. Conventional Wall Street Wisdom
Conventional Wall Street wisdom suggests that extremely low VIX (VXX) readings precede major market tops, but the facts disagree.
The last two major stock market tops did not coincide with low VIX (Chicago Options: ^VIX) readings.
Figure 1 offers a long-term comparison between the S&P 500 and the VIX. The dashed red lines mark the March 2000 and October 2007 tops.
Figure 2 provides more details on the 2000 high. The S&P 500 recorded top tick at 1,552.87 on March 24. The VIX traded at 22.12 that day.
Figure 3 zooms in on the 2007 top. The S&P 500 peaked on October 11 at 1,576.09. The VIX traded as low as 16.08 that day.
On June 6, 2014, the VIX dipped to 10.73, the lowest level since February 26, 2007. This may represent a certain degree of complacency, but based on recent historic patterns it's not a signal for a major top.
As a general reference, below is a VIX seasonality chart based on VIX prices from 1990 - 2013. Based on seasonality the VIX (TVIX) should soon start to climb.
VIX seasonality suggest a correction is on the horizon. But there's a difference between a temporary correction and a crash or major top.
The Profit Radar Report just released another report that looks at market breadth (volume, momentum, a/d, etc.) and shows how one under appreciated indicator has spotted every major market crash (1987, 2000, 2007). The same indicator signaled that the 2010, 2011 and 2012 corrections would just be temporary.
A detailed look at this indicator is available here: How to Discern a Major Market Top
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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