Mid-Week Battle Plan: A Big Move Is Near — Here’s Why, Part 2

• July 31, 2003
• Larry Connors

Our primary trading encompasses the philosophy that
markets move sectors, and
sectors move stocks. Here are our thoughts for the day:

Markets

Yesterday we
looked at the fact that periods of low volatility are followed by high
volatility and that periods of high volatility are followed by periods of low
volatility. Obviously, we are in a a tight trading range
(low volatility) that will likely lead to a substantial breakout one way or
another. Which direction that breakout will take is never perfectly known, but
let’s look at some historical statistics to guide us. And, in my opinion, the
best indicator to help get us to an opinion is the VIX.

Through today,
the VIX has gone 98 consecutive days without making a new 20-day high.
This ties the longest streak since the VIX’s inception in 1986. The other time this happened, it ended on 9/6/00. After making that
20-day high, the S&P immediately lost 10% of its value over the next
month and a half. The third-longest period
the VIX went without making a new 20-day high was 72 days ending
8/11/87. This preceded the crash of October
1987 The fourth-longest period was 71 days ending
1/24/03. From there the S&Ps fell almost 7% in the following 3 weeks.

What does this
tell us? That at least looking back, when we’ve seen such sustained periods of
low VIX readings, the market has responded by dropping. Now, I’ll be the first
to tell you, this absolutely does not mean that is what has to happen again.
There are many good solid reasons prices have risen over the past 4 months.
But, when you look at things on a historical and statistical basis as I do,
it’s sending us a strong caution sign and saying that it may be prudent to
start locking some profits in. And, if you’re very aggressive, the better
opportunities for outsized gains, may be to the downside, especially over the
short-term