Extreme VIX Reading Signals Turnaround
One thing the recent market weakness has accomplished is to turn consensus opinion firmly bearish. There is no doubt about it. Sentiment, as measured by the VIX, has made an extreme move on a long-term basis, and it may be another signal that this market has gone about as far as it can to the downside without some lift occurring first.
The VIX is simply a measure of fear, as volatility is a nice-sounding word for fear. When the consensus becomes this one-sided, the probabilities of a swing the other way and a reversion to a more median reading in the VIX away from the recent extreme, increases significantly.
|Market Volatility Index|
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In a normal world, most price movement is contained to about two standard deviations. The VIX has moved out beyond four standard deviations of the 200-day moving average. A four-standard-deviation move away from the 200-day moving average marks an extreme move that we have seen in only 11 previous situations. The market has shown a strong upside bias once a signal has been reached.Many technicians have looked at this selloff and are predicting the start of a bear market. This may be the case, but it's just a guess, nothing more. The market is oversold, as measured by our 40-day SARSI indicator, the uptrend channel for this rally remains intact, the long-term trend for breadth remains intact and sentiment is at a rare bearish extreme. All the signs for a bullish reversal are there. If this is the start of a bear market, you won't know until the rally plays out. The decline isn't the key, the rally is. We would watch for a weak countertrend type of move back toward the prior highs to start getting bearish, not now with every bullish reversal signal in the book flashing "buy."
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|VIX Four-Standard-Deviation Move|
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