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VIX, VXN and the Three Cs~ This Ominous Silence of the Lambs
Investment industry insider professionals trade off VIX.
When VIX is low, they sell stock market highs.
When VIX is high, they buy stock market lows.
Lately, like today, the market has been going lower, and the VIX has been going lower with it, a very unusual market divergence.
For illustration, we prefer to use VXN, Vixen, a more suggestive measure of market volatility for the leading NDX/QQQQ indicator, the largest 100 NASDAQ stocks, mostly high tech.
VXN hit a low of 17.73 on Wednesday 14 January 2010, a sell signal, and a high of 29.12 on Thursday 22 January 2010, usually a buy signal.
Yet there was a -9% NDX decline from Monday 11 January to Friday 5 February 2010, a divergence. Conventional Headline TV wisdom is talking about buying dips while the divergence between market direction and volatility may be suggesting a serious market storm.
http://stockcharts.com/charts/gallery.html?s=%24vxn
http://stockcharts.com/charts/gallery.html?s=ndx
What is interesting here, the dog that did not bark, is that with the market some -5% lower since last Friday, the VXN volatility measure did not rise to reflect higher expected risk per usual, but went some -13% lower.
Either Volatility became a leading indicator, somebody thinks they know something, or there is a lot of market complacency.
People have been programmed to buy dips after the 66% market rally from last March lows.
We think this complacency may be an even bigger warning sign for Mr Market.
Back when we were becoming an investment professional, we listened to Robert Farrell, All American Chief Market Analyst for Merrill, on the squawk box almost every day.
Back in the Seventies, he used to say, There are three C’s for all markets.
