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 trying 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 specific “volatility regime.” Let’s evaluation what we have discovered about volatility in 2022.
I see this chart in mainly 5 phases. The primary section, via early 2020, was a comparatively low volatility atmosphere the place the VIX moved between 10 and 20. Then we’ve the spike through the March 2020 drop, the place the VIX reached up above 80. The third section is the second half of 2020, the place the VIX fluctuated between 20 and 40. Through the summer time of 2021, we entered a fourth section that includes a low VIX between 15 and 25.
Since November 2021, we have been in a fifth section, with the VIX ranging between 20 and 30-35. Be aware how the short-term market bottoms in November 2021, January 2022, March 2022, Could 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. Be aware the one outlier, which was the June short-term peak, the place the VX solely reached all the way 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 true the place volatility was sitting once we reached the March and January market peaks. What would negate this bearish categorization, and help extra of a bullish case within the coming weeks?
Fairly merely, the VIX would wish 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 prime, 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 sturdy 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 writer doesn’t have a place in talked about securities on the time of publication. Any opinions expressed herein are solely these of the writer, and don’t in any approach characterize the views or opinions of some other particular person or entity.
David Keller, CMT is Chief Market Strategist at StockCharts.com, the place he helps traders reduce behavioral biases via technical evaluation. He’s a frequent host on StockCharts TV, and he relates mindfulness methods to investor determination making in his weblog, The Aware Investor.
David can be President and Chief Strategist at Sierra Alpha Analysis LLC, a boutique funding analysis agency centered on managing danger via market consciousness. He combines the strengths of technical evaluation, behavioral finance, and knowledge visualization to establish funding alternatives and enrich relationships between advisors and shoppers.