Let's talk about the CBOE Volatility Index (VIX) today, as I've received more questions on this indicator in the past few days than I have in a very long time. The main questions center around the pattern and the level of the VIX.
First, while I think the VIX is a great indicator when it gets jumpy, I don't see much use for it when it goes down; we've seen plenty of times when the VIX has declined and stayed there. I also do not think VIX patterns are particularly helpful. Granted, after a period of volatility, we can often say to ourselves that there had been higher lows in the VIX, or a head-and-shoulders pattern. But in January, for instance, I saw many folks fussing over the VIX below 14. Did it matter? It did not.
So now folks want to know if I see a W-shaped pattern in the VIX. Sure I do. But the question shouldn't be whether it's there. The question should be whether this matters -- and I don't know the answer to that.
I think, if you wanted to focus on the bearish side of things, there are plenty of clearer indicators to work with. For example, Tuesday's breadth was great, yet the McClellan Summation Index still hasn't nudged itself back upward.
Also, the 21-day moving average of the put-call ratio is now heading decisively upward, something it does when the market is close to a high.
Yet none of these indicators matter at the moment. A market that lacks excitement and emotion is one that usually lacks participants, leading to the kind of grind we've been seeing of late. A reader asked if I thought there was giddiness in the market Tuesday. But how is this possible to measure when, once again, the big move takes place 30 minutes into the opening of trade, and the market churns for the rest of the session? This is not the kind of action that leads to high-fives. What gets folks excited is a market that swings, whether it's up or down.
What I thought was most interesting about Tuesday's action was that, despite the constant chatter about high gas prices hurting the consumer, retailers yawned and finally traded higher.
Defensive stocks did very well, too. Tobacco, drugs, soaps and toilet paper did much better than, say, copper, which broke an uptrend line Tuesday. Sure, it might have gone down because of the Chinese market, but that mean two charts with broken uptrend lines -- copper and the iShares FTSE/Xinhua China 25 Index (FXI).
So, yes, the VIX should rally. But, in that vein, the S&P 500 should pull back -- and it isn't doing so.
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