The Curious Case of Elevated Volatility [Weight of Evidence, Part 2 of 7]

The Curious Case of Elevated Volatility [Weight of Evidence,…

November 13, 2014April 13, 2022

“Fear tends to manifest itself much quicker than greed, so volatile markets tend to be on the downside. In up markets, volatility tends to gradually decline.” ~ Philip Roth

The CBOE Volatility Index is often referred to as the FEAR Index. This forward looking index is calculated from option activity, and reflects the market’s expectation of 30-day volatility. We like to look for divergences between the VIX and the US Market. We look for odd behavior. Normally, as would be expected, when fear/volatility increase, stocks decrease in price – and vice versa. However, sometimes a change in market sentiment from greed to fear (and the opposite also applies) can tip its hand. When we see fear/volatility increase along with market prices, we take notice. This is odd behavior and could be a warning sign that market participants (big money managers) are changing their mood.

Below are two charts: one from 2007 and one from today (2014). Both show that while the US Market (in this case, the S&P 500) is making higher highs, the VIX is making higher lows. They are moving together. Odd behavior. In 2007, this was a clue that a change in trend was approaching. And as you can see, the same is taking place now. Does it mean that this is the top of the market for the foreseeable future? No. But, it means we’re going to keep close eye on the price action from here until this odd behavior resolves itself. Those who are looking for the bull market to continue want to see lower lows in the VIX and the market to hold onto these highs.

Stay curious, investor. Check back again tomorrow as we’ll have more to add. And if you find this information useful, make sure to share the wealth using the share buttons at the bottom of this article.

Headlines Sell [Weight of Evidence, Part 1 of 7]

It’s Just US Against the World [Weight of Evidence, Part 3 of 7]

David F. Zarling, CMT

David Zarling, CMT is Head of Investment Strategy and Research for Client First Tax & Wealth Advisors, a Registered Investment Advisor. Using his strong industry insight and background, David is responsible for managing our clients’ investments using the Adaptiv Investment Management System. This proprietary approach is built on the bedrock of supply and demand (aka price), which is used to identify investment trends across all asset classes: stocks, bonds, commodities, and currencies. This top-down approach has proven effective for managing risk in a variety of market environments. With 19+ years of experience in the industry, David brings institutional-class asset management to our clients’ portfolios.

8 COMMENTS

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