Volatility & Sentiment

The long side of Volatility continues to be the wrong side of the trade. This condition cannot continue indefinitely.

Today’s very strong sentiment numbers of 103.9 (versus a consensus of 97) combines with generally good earnings reports to pressure the Vix further, and is leading to yet another sell off of Vols. The VIX broke 15 (intraday), and we are stone’s throw from the 52 week lows of 14.66. All the while, we continue to see plenty of signs of complacency and speculative excess.

I’m looking for a fresh run at new volatility lows over the next few weeks, as the earnings season winds on. This is a possible set up of the first real sell off and test of the Bull move since March 2003. The market is getting extended, and by February, we will be entering a relatively “catalyst free” period.

Back in mid-October, we noted that a significant slide in the VIX as signaling an imminent short-term correction. That VIX move, from 23.26 to about 16.19 represented a drop of over 30%. That call saw the Dow drop nearly 5% over the next 10 days, and the Nasdaq give up well over 100 points.

We also noted a similar drop in VIX and QQV charts on December 18. That VIX drop began from just over 18, and poked beneath 15.52 for a 15% move – half of the prior signal. It was not enough to get us excited that massive complacency has set into the market. While there was some lack of fear, it was not at levels that reliably signalled an imminent reversal or sell off. We also noted that Seasonal factors were working against a sell off at that time.

This VIX move down (18.33-14.90) is now 18%+, already more than the December move. Any slide towards 14 — about a 25% drop — would put us at levels that suggest a short term reversal and modest (7%) correction.

We will be watching these factors closely as we move through earnings season . . .

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  1. Eddy commented on Jan 17

    Great Blog. I think you’re right about a near-term pullback. I noticed that on Friday the 10-year tried and failed to break its October 1 peak. I think this could lead to a sell-off at the long end, which would put pressure on stocks.

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