This past month has seen some very sharp moves in the markets. No doubt that is due to elevated volatility. The VIX, or the fear gauge has spent a generous amount of time above the 30% area. In fact, over the last 20 periods the index has not been under 30% for 15 sessions. That is a big number when you realize the VIX historically trends lower - with the occasional bounce to scare everyone.
This elevated condition has created quite a quandary for market participants. As we have seen the big moves back n' forth, volatility has seemingly gone nowhere as a market measure.
Now let's understand what a 30% VIX represents: approximately a 2% move daily in the markets. What is 2% exactly? With the S&P 500 at 3770, that means 75 points is implied or expected - each day! That is a huge expected move, but basically priced in. We have seen these big moves happen lately - October 13th saw enormous intraday moves on the S&P futures, from up 44 to down 80 to up 108. Whew! Meanwhile, the VIX barely moved.
Why is the VIX not moving much with the markets these days? A few reasons, but the best explainable one is big time investors/players already have put insurance and are not in the market to buy more. They are holding that protection, not selling it - which is an important point in looking at the lack of VIX movement vs. the price action.
In addition, the price action has just been downright nasty. Since the start of the fall season there have been new lows created since breaking those June lows, and while we ended the week much higher than those lows (3650 or so), there is plenty of resistance ahead and chances for the price moves up to suddenly halt.
Days like Friday and last Monday have the bulls hungry for more upside, with the belief that they can overcome the long-standing bear market. It's not that easy of course, and as we like to say, 'You don't tell the markets what to do'. Potential upside? To the 50 ma around 3880 is what I can see, and that could happen very quickly - this week even. But after that, we'll be looking for some more downside, keeping the protection on, especially if the VIX remains stubbornly high.