Attempting to gauge where and when the market is going to turn has become a costly game. There's little incentive to buy ahead of the quarter and year end. Some managers are outperforming by simply not buying if they hold a higher than average cash position. We're still a long way from the Christmas Eve bottom, but potentially giving back half of Wednesday's rally a day later is not a good look.
There is an interesting chart worth a look though. The emergence of algorithmic trading and passive ETF investing has muted the Volatility Index (VIX.X) for the most part. What used to offer a deeper dive into the psychology of the market faded in relevance. Then, the Volatility of the VIX (VVIX) was born. This provides "shock numbers" more similar to the VIX of yesteryear, but may have opened up something better in the current market.
Check out of this ratio chart of the VVIX to the VIX (red line). Behind the ratio, I included the performance of the S&P 500 (black line). What do you notice? I think it's obvious to see these two measures, on a weekly basis, have moved hand-in-hand during 2018. Outside of a few weeks in September, the correlation between the ratio and the S&P 500 has been almost perfect since March.
I realize this is only one year's worth of data, fifty-two points, but in my view, it merits watching during the first quarter of 2019. When the market rises, but the ratio fails to follow, stock rallies have failed to hold. On the flip side, we should be on the lookout for bullish divergences as well where the ratio rises, but stocks lag behind. That could be our first hint at an upcoming rally.
Edges are difficult to find in this environment. Some non-traditional metrics may be required to outperform in 2019.