Look At This VIX Study…

  • July 19, 2004
  • Rob Hanna

As I
write this around 2pm, the market is basically flat.  Since my last
column, the market has continued to steadily sell off without any signs of
panic.  Since June 24th the S&P 500 has dropped more than 3.5%. 
During that same time period the VXO has hardly moved at all.  In fact, it
hasn’t managed to close 10% above it’s 10-day moving average even once during
the recent selloff.  So the question now becomes, does this mean anything?

 

I did a study over the weekend
looking back ten years to find other times when the S&P 500 has had a 3+ week
selloff of at least 3% and the VXO never spiked.  This occurred eleven times
over the last ten years.  The times when it occurred were:

 

3/97, 5/99, 5/00, 7/00, 9/00,
12/00, 2/01, 6/01, 1/2002, 4/02, 3/03.

 

Rather than post all those
charts I’ll give you the quick and dirty of what I saw.  You can then check out
the charts yourself before drawing any conclusions.  In 8 of the 11 cases I
found, the selloff did not resolve itself before the market first saw a steep
drop, effectively shaking out the rest of the bulls.  In some cases (i.e. 4/97,
12/00, 02/03) the further selloff, though sharp, was brief.  Other times (i.e.
2/01, 04/02) it lead to a much deeper correction.  The three times when the
market failed to sell off sharply before reversing occurred in 5/99, 5/00, and
7/00.

 

Is this study with only 11
examples worth enough to lay a big bet on the direction of the market?  No way. 
Is it worth enough that you should prepare yourself for the possibility of
capitulation move to the downside sometime in the near future?  In my opinion,
yes.

 

Best of luck with your trading,

 

Rob



robhanna@comcast.net

Â