I analyze macroeconomic issues from a fundamental perspective, and I analyze market behavior from a technical perspective. Original macroeconomic analysis can be found here and both macro analysis and commentary can be found on my Caps blog. If you like or appreciate my analysis, please add yourself to my Following List

Monday, February 7, 2011

The VIX and Market Tops and Bottoms

The VIX (as a measure of implied volatility which is an indirect measure of nervousness/sentiment) has been often used as a measure of sentiment and looking for divergence has often given a clue to market moves.

I examine this occasionally in my sentiment charts: Sentiment Chart.

I wanted to do two things in this post: take a longer look back, and to plot the "inverse VIX" (1/VIX) to pick out the divergences more obviously / intuitively.

When looked at in this manner, there is obvious divergence between market tops and market bottoms, which is what we expect.

But based on the last two major tops (2000 and 2007), the VIX had very obvious divergence with the SPX. That isn't exactly what we are seeing now.

The VIX is making essentially a double bottom (or as shown below, the inverse VIX is making a double top) when measured on the timeframe of a year.

I would be very hard pressed to call this divergence 'obvious', especially compared to the last two major tops.

This is another market measure that leads to the conclusion that I reached a few months ago: Whatever top we find here will not be a 'major' top. For more discussion on my long term thoughts, see here: Macro Thoughts and Observations. Is the Bear Market Dead? Is this the Start of a new Secular Bull Market?

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