This year is very straight forward. In January, at the time of the blow-out AAPL earnings that catapulted the markets higher, the ratio moved above 68 to signal that any bear hopes should be tossed aside to instead jump on the bull train. The party continues until the May selloff when the ratio dropped under 68 indicating big trouble ahead. However, the bears were stuffed again as the ratio confirmed the new bull rally in June. The party continues up thru today with the ratio spending the last one-half year above 68. The wine is flowing like water as the bulls throw confetti each day knowing that the Fed will always be there to pat their behinds.
However, at 72.89, the lowest print in five months, the luster is off the rose, and the once blossoming rally is now becoming the stinking pile of leftover flowers laying in the dumpster out back. As long as the market bulls can keep the ratio above 68, the party will continue. If the SPX:VIX ratio drops under 68, the party is over for the markets, and far lower numbers are ahead. The broad indexes will experience a large drop when 68 ruptures and a triple digit loss on the Dow would be expected. Now that VIX is climbing higher the ratio is dropping more quickly. The only question is will the ratio drop thru 68 today, tomorrow, next week, or next month? 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.
Note Added 12/27/12 at 1:16 PM: Lots of excitement today. The SPX:VIX ratio collapsed thru 68 at 12:30 PM signaling lots of bad stuff ahead for markets including a crash alert, but, alas, the ratio popped back above 68 at 1 PM. Watch the ratio moving forward.
Note Added 12/28/12 at 6:22 AM: The day ended with the ratio at 72.84 so the bulls are holding on. The 68 level, as seen from yesterday's market action, brings on a wrath of negativity should it fail.
Note Added 12/30/12 at 4:12 AM: On Friday, 12/28/12, the ratio collapsed thru 68 closing at 61. The Dow dropped 158 points.
Good-morning KS.
ReplyDeleteI was wondering about how you use the SPX:VIX indicator, specifically because since the bottom of the 2008 decline, it took almost a year to regain the 68 level.
Thanks for the great work.
KS, I see how your "68" level has recently worked, but I do not understand the logic as to why the number 68 should be fixed in concrete. For example, the S&P 500 was 450 - 550 during 1993 - 1995. It is now around 1400, and at some point in the future it could be in the 1600 - 1800 range as the economy expands and earnings grow. But, VIX, on the other hand does not have a dynamic growth aspect to it, just a cyclical bull/bear boundary.
ReplyDeleteSo, will your "68" level increase to a "72" level, as the S&P earnings eventually move higher?
thanks!
arb
All are valid points but the indicator has worked well in recent years so always stick with something that works and it may work for many years to come. The 68 is for the bullish side, the 35 level is for the bear side. It is always updated on the Turn Signal page so you can look back at previous bull and bear trigger dates. The ratio is simply a useful indicator that further verifies the way your portfolio is weighted, or not. For example, if you are leaning bearish, and you see the ratio fall thru 68, you are a happy camper since there is carnage ahead, all the way until it goes down and under 35. But, if you are weighted on the bear side and it remains above 68 and heads higher again, then the bulls will maintain control and the bears will fell pain. The VIX also has a larger impact on the ratio since it can move from say 10 to 50, whereas the SPX may have a range of 1000-1700.
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