Thursday, July 13, 2017
SPX:VIX Ratio and SPX S&P 500 Daily Charts
The SPX:VIX ratio is useful in identifying key stock market bottoms. This is because the ratio emphasizes large spikes in volatility which reflects panic and fear the best time to go long. The VIX is a useful signal when it spikes higher since it can identify a bottom in the stock market but is not as much use when it is low, like now at sub 10, since the VIX can remain low a long time and calling a market top can be more elusive. Use the low CPCE and CPC put/call ratios to help identify market tops.
Think back to your high school days and fractions. A ratio is a fraction. For the SPX:VIX ratio, it is a fraction of the S&P 500 price in the numerator (top number) divided by the VIX volatility number in the denominator (bottom number). When the S&P 500 rallies and price is moving higher and higher, like the last nine years, the SPX:VIX ratio will move higher. If the SPX moves lower, the ratio will move lower. If the VIX (volatility) moves higher (bearish for stocks), the SPX:VIX ratio will move lower and if the VIX moves lower (bullish for the stock market), the SPX:VIX ratio will move higher.
The SPX is at record highs and the VIX is at multi-decade uber lows. Therefore, the ratio should be at nosebleed stratospheric levels, which it is at 247. The green circles show the key bottoms in the stock market over the last year (timie to go long). Once the market starts to sell off and accelerate lower, the VIX is spiking vertically higher, traders are panicking throwing stocks overboard with reckless abandon, some investors screaming that the end is near, this sends the SPX:VIX ratio lower and that spike lower in the ratio identifies the stock market bottom. You always buy when there is blood in the streets. Therefore, you do not want to be long stocks right now. Keep your powder dry and be patient and do not start nibbling on the long side until the SPX:VIX ratio begins printing inside the green box in the right margin. This information is for educational and entertainment purposes only. Do not invest based on anything you read or view here. Consult your financial advisor before making any investment decision.