Watch the VIX to Identify the S&P's Next Big MoveAug 21, 2012
Chad Karnes, CMT
The VIX sits near its yearly lows, but it may be better to be late rather than early to this party. Avoid top picking and wait for an appropriate signal to short the S&P.
Early to bed and early to rise makes a man healthy, wealthy, and wise, the old saying goes. But, being early to a trade can have the opposite effect, potentially losing money.
On Aug 6 we wrote an article on the VIX that identified a high probability trade that was setting up. With the VIX (CHICAGOOPTIONS:^VIX) under $15 today, that setup has still not triggered and we continue to wait patiently for its tradeable signal.
The negative news headlines and supposed fear have not let up this year. But, like early August and early July, the VIX is still hovering near yearly lows and not showing the fear that is being portrayed by the news. Something is being missed by the media, and the VIX is telling us what.
“Did Wal-Mart (NYSE:WMT) Just Douse hopes for a Recovery” – August 16, 2012
“Ford (NYSE:F) Europe Sales Fall as Economy Struggles” – August 16, 2012
“Facebook (NasdaqGS:FB) director Thiel sold 20 million shares after lockup” – August 20, 2012
Given the negative news environment, an expected sky-high VIX would not seem out of the question. This simply has not been the case as the VIX sits near its yearly lows and actually shows that investors are not really worried at all. Although the news portrays fear at an extreme, the VIX is showing us that risk is actually expected to be low.
Time to Buy the VIX again?
With all of the negativity in the media, investors following it might be perplexed that the stock market (NYSEARCA:IVV) is up 12% year to date, with some popular index ETFs like the iShares S&P 500 Growth Index (NYSEARCA: IVW) up 14%.
Examining the VIX and its relationship to the market, on 8/12 with its price at $14.74, we stated in the ETF Profit Strategy Update, “The VIX continues to churn below the all-important $16 level. We will watch the VIX for another signal that the S&Ps attitude has changed, and a sign that VIX ETFs can be entered long”.
Today the VIX is still confirming the market's complacency and continued S&P price advance, but that time may be ending soon. Until it does, the market will likely continue its rally.
The below chart shows some of that VIX analysis and highlights some of the levels we are monitoring to tell us when the VIX bottom is in place. When that occurs we will be ready.
(to see an updated version of the chart and key price levels click here.)
If used correctly, the VIX can help you spot potential market turning points and show when sentiment is at extremes. Some ETFs that can be used to take advantage of the VIX setup, when it does occur, are the ProShares VIX Short-Term Futures ETF (NYSEARCA:VIXY), the ProShares Short VIX Short-Term Futures ETF (NYSEARCA:SVXY), and the ProShares Ultra VIX Short-Term Futures ETF (NYSEARCA:UVXY).
Used in conjuction with other tools, the VIX gives us clues about the market's next big move. Each month the ETF Profit Strategy Newsletter, and a few times a week via the Technical Forecast, we use key indicators like sentiment, and breadth to identify high probability trading setups for the S&P 500, the VIX, and ETFs linked to major asset classes.