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Why a Decrease VIX is Bearish for Shares

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Whereas the VIX is commonly termed the “worry gauge” due to its inverse relationship to shares, it is actually extra of a measure of volatility — implied volatility, that’s, which suggests it is wanting on the S&P 500 choices market, which then “implies” a volatility for the S&P 500 index.

I have a tendency to explain the VIX as being in a selected “volatility regime.” Let’s evaluate what we have realized about volatility in 2022.

I see this chart in principally 5 phases. The primary part, by early 2020, was a comparatively low volatility setting the place the VIX moved between 10 and 20. Then we have now the spike in the course of the March 2020 drop, the place the VIX reached up above 80. The third part is the second half of 2020, the place the VIX fluctuated between 20 and 40. In the course of the summer time of 2021, we entered a fourth part that includes a low VIX between 15 and 25.

Since November 2021, we have been in a fifth part, with the VIX ranging between 20 and 30-35. Observe how the short-term market bottoms in November 2021, January 2022, March 2022, Might 2022 and June 2022 all noticed the VIX push simply above 30. The market tops in January 2022 and March 2022 each noticed the VIX drop beneath 20. Observe the one outlier, which was the June short-term peak, the place the VX solely reached right down to 25.

This chart summarizes the “bear market rally is now over” thesis. This present volatility regime has seen usually elevated volatility, but additionally a clearly outlined vary. The VIX is now on the decrease finish of that vary, which is correct the place volatility was sitting once we reached the March and January market peaks. What would negate this bearish categorization, and assist extra of a bullish case within the coming weeks?

Fairly merely, the VIX would want to get low, and keep low. By remaining at or beneath 20, the market could be signaling a “change of character,” the place the market would stay comparatively low quantity because the S&P 500 eclipses 4200.

Together with our feedback final week on breadth indicators indicating a possible market high, this outlines some key parts of our thesis that the bear market rally is on the exhaustion level.

What would persuade us in any other case? A break above S&P 4200 with robust breadth and low volatility would trigger us to sharpen our pencils and description some upside targets for shares!

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David Keller, CMT

Chief Market Strategist


Disclaimer: This weblog is for instructional functions solely and shouldn’t be construed as monetary recommendation. The concepts and techniques ought to by no means be used with out first assessing your personal private and monetary scenario, or with out consulting a monetary skilled. 

The creator doesn’t have a place in talked about securities on the time of publication.   Any opinions expressed herein are solely these of the creator, and don’t in any means symbolize the views or opinions of every other individual or entity.

David Keller

In regards to the creator:
, CMT is Chief Market Strategist at StockCharts.com, the place he helps traders decrease behavioral biases by technical evaluation. He’s a frequent host on StockCharts TV, and he relates mindfulness methods to investor choice making in his weblog, The Aware Investor.

David can also be President and Chief Strategist at Sierra Alpha Analysis LLC, a boutique funding analysis agency targeted on managing danger by market consciousness. He combines the strengths of technical evaluation, behavioral finance, and information visualization to determine funding alternatives and enrich relationships between advisors and purchasers.
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