Last week everyone made notice of one thing:
The market was down.
The smarter traders noticed something else:
the VIX was down.
Generally when the market is down and the VIX is down at the same time, that tends to be bullish.
However, things are a little different this time around.
Because we just got over a crazy period of the VIX going up while the market went up.
This is a strange occurrence…and something I look for as a sign the market might have a serious drop coming (we warned our VIX Edge readers for days ahead of the selling that began two weeks ago).
When the VIX goes up with the market, then drops when the market sells off, it certainly means that the market is not ‘panicking’ but does it mean it’s going to rally?
Many are comparing what is going on now to 2000-2001.
As a history lesson, vol went UP during the late 90’s dotcom market explosion.
It then started to ease off in the 00’s and in 01…all the way through September 11th.
This happened, even as the market was CLEARLY cooling?
The chart above shows two charts, on the top is the S&P 500 from 1/4/99 to 8/1/01, the bottom is the VIX over the same time period.
You should notice that the VIX, while it still has spikes, is trending lower, from the end of 1999 all the way to the middle of 2001.
There is a NOTICEABLE drop in the SPX and VIX through a large portion of ‘01.
This was because implied volatility (the cost of options) was so high the market was looking for selling in the S&P 500.
My point is, just because volatility is coming down with the market, does not mean a bottom is in.
Even with today’s huge knee jerk bounce, the market might quickly turn around and start selling off again.
When vol ramps with the market, and then sells off with the market, we are in rare territory…
But we have seen it before…
The result was a down market.
Your Only Option,