The VIX is in Decline

As I mentioned in this morning's opening post, the VIX had declined below its 10 day moving average (MA) but the S&P 500 Index had failed to make a higher high, which threatened the legitimacy of the recent uptrend.

A reader asked whether my interpretation of the decline in the VIX has changed since my May 13 post. The pertinent parts of that post include data from Sentiment Trader .

"Since 1990, [when] the VIX hit a six-month low, while the S&P 500, on which the VIX is based, was still at least 1% below its own three-month high ... returns in the S&P 500 going forward were substandard (and negative) going out as far as two months. From one to 10 days out, the S&P was positive less than 45% of the time, and showed an average return that varied between -0.1% and -0.8%. In the last bear market, there were two pockets of concentrated readings like this, and both led to very poor performance going forward. Those were in early and late June 2001, and again in mid-March 2002."

My response: "this may be an inflection, call it froth or a boiling point, but something is cooking. While I don't mind trying a bite of something new, I'm getting the feeling that now is a time to be careful. This market is a snake sitting still, warming up on rock and getting ready to strike."

And strike it did. Four days later, the S&P spiked up to an intra-day high of 1443 and closed near unchanged on the day, which created a bearish spike. The index then went on a precipitous decline falling some 15% to the July 15 low.

Even with the recent climb out of that hole, which stalled at the 1310 level on August 11, (and which coincided with a 50% retracement) the S&P remains nearly 7% below that 5/19 peak.

The recent decline in the VIX is not as dramatic as it was in May, but the price action is eerily similar and along with the data above offers an analogous situation as to what expect in the coming days and months ahead. .

While the recent decline in the VIX is not as dramatic as was in May but the price action is eerily similar and along with the data above offers an analogous situation as to what expect in the coming days and months ahead. Until the S&P can close above the 1300-1310 level we remain in a bear.

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Steven Smith writes regularly for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He was a seatholding member of the Chicago Board of Trade (CBOT) and the Chicago Board Options Exchange (CBOE) from May 1989 to August 1995. During that six-year period, he traded multiple markets for his own personal account and acted as an executing broker for third-party accounts. He appreciates your feedback; click here to send him an email.

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