Monday, December 12, 2016

Watch VIX as S&P Rises

I am not getting any imminent signs that the market is topping out.  One of my favorite indicators of a market top is when volatility rises with the S&P 500.  It is not that common, but it was deadly accurate in forecasting the top in the summer of 2007 and the market weakness in January 2015.  I vividly remember when the VIX was stubbornly high in the December 2014 holiday period even though the market had just made a short term bottom and was rallying strongly.  If you look at the VIX chart from 2014-2015 below, you will see the VIX stayed above 14, making a higher high as the S&P was making higher highs.

The connection is much more obvious in 2007 when the VIX bottomed out below 10 in February 2007 and preceded to rally with the S&P into the summer, as the S&P was making new highs week after week.  Right now, the VIX is making lower lows as the S&P is hitting new highs.  So there is no inverse VIX divergence signal with the S&P.  You need to be patient here with shorts, as it looks like we will be making higher highs in early 2017.  It is too early to try to call a top.  Give the rally time till at least February 2017, or whenever the Trump tax cuts get passed, probably sometime in spring 2017.

SPX 2007
VIX 2007
SPX 2014-2015
VIX 2014-2015
SPX 2016
VIX 2016

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