Wednesday, May 14, 2014

VIX Index Readying for a Major Support Test

For more than a year I have pointed to the importance of a support level in the VIX Index that dates to mid-March, 2013 at 11.52.  This level marks the base of a bullish window that was opened following a test of support from 5 years earlier (March ’07).  Since March 2007, the index had never reached a ‘10’ handle until March ’13.  Following that test, the index sprang higher and while there have been multiple occasions where the index has returned toward support at 11.52, it has never since touched, much less settled below this level.  

Longer term, I continue to anticipate that a settlement below 11.52 in the VIX will usher in a relatively long period (1-2 years) of grinding and moderate equity gains.  I suggested last year that this may happen in the first half of this year. 

More often than not we consider a low reading in the VIX as a warning against over-complacency where the risk for a spike in realized volatility is under-appreciated.  However, there are times when a low VIX has preceded longer-run advancing equity prices.  Clearly the low VIX in early 2007 was not an ‘all clear’ sign.  However, both in late 1994 and 2004, the VIX index reached into low double digits before the S&P advanced rather smartly over the next 16 months (chart).  

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