Friday, July 10, 2015

VIX Remains Relatively Strong

The VIX should be imploding today amidst the global rally in stocks, but the VIX is actually higher compared to the same SPX price level from yesterday.  In other words, volatility is being bought in this market despite a strong market today.  Contrary to what most people think, the VIX is actually a leading indicator, when it diverges like this versus the S&P 500.

These gap up opens on Greece deal news and a strong Chinese market aren't doing the job.  The Chinese market is so manipulated that having half of the stocks halted is going to have terribly bearish ramifications for that market.  And their real estate market isn't doing too hot either.  Usually the US can shrug these things off, but this is an old bull market, the BTFD strategy is not going to work as well as it did in years past, or even earlier this year.

We should be rallying with all this bearish sentiment but these good news gap ups aren't doing the job of washing out the BTFD hopefuls.  You probably need a break of SPX 2040, where a lot of bulls are making a stand, in order to get that flush out you need to get a real bottom.  It just isn't attracting enough strong hands at these levels.  Everyone is looking to get out on a rally at these prices.  When you get lower prices and some real fear, then you will wash out the weak hands and put stocks back in strong hands again.

The other option is to form a messy U bottom, where rallies are faded and dips are bought, until you wear out the bulls, and exhaust the bear fuel, and eventually go higher.  That is what happened in June 2011, but they have been rare the last few years, as almost everything has been a V bottom.  There is no edge here, just watching.


MM111 said...

Do you think this correction is likely to continue for a while then?

Market Owl said...

Actually, with today's price action I believe we have made a bottom. Right after my post, the VIX futures took a nosedive and has caught up to the bullish SPX price action. I expect a grind higher next week as risk is taken back on the sheets of the fund managers.