To let the VIX go unnoticed right now would be like not guarding Michael Jordan with 5 seconds left in a basketball game and the Bulls down by 1, it’d just be stupid. The VIX is only 4% away from its year-to-date high of 25.14. Recently, when the VIX has crept towards its year-to-date high, which its done a lot of this month, its broken thru it. That recent history, combined with oil continuing to move lower, is the main reason we expect the S&P500 to continue to slide lower and pierce 1,291. The question is when that will be?
On February 10th, the VIX hit what turned out to be a 3 month high at 21.98 or damn near 22. On may 16th the VIX finally closed above that prior 3 month high, and since then the S&P500 has been very volatile. In the 10 trading days since 5/16, SPX has averaged a daily trading range of 18.8 points. This is not good news for bulls. Why not? Because periods of increasing volatility tend to precede moves lower in SPX.
If you take the 5/15 closing price of 1,330 (the day before the VIX broke the key 22 level) SPX has declined by 1.2%. So here’s the problem:
From the most recent 1,422 year-to-date high in SPX to the recent low at 1,291 SPX pulled back 9.2%. However, this pullback has not come amidst elevated volatility like you might expect. Only recently has volatility begun to reach levels that tends to coincide with broader market weakness. Yet since that time, SPX is only lower by 1.2%. Meanwhile with the VIX only 4% away from its year-to-date higher, a breakout above it could see SPX sell off especially hard in an effort to catch up to the increasing volatility.
In other words what we’re saying is that the market may be in store for a continuation of this move lower due to a delayed bearish reaction to the recent volatility. In our view, confirmation of a true bottom won’t come without a severe erosion in volatility back below the 20 level. Above 20 the VIX will remain a consistent threat to any bounces.
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