One of the indicators I like to look at the stock market is the relationship between it and expected volatility as indicated by the. Typically, these should move in opposite directions: When stocks rise, volatility should fall and vice versa. If there is a deviation, it may be a signal of an impending reversal.
For example, several important peaks (and bottoms) have been identified by a discrepancy between the and the VIX Index. At the top of 2007, the VIX showed a significant non-confirmation that served as a red flag.
Conversely, when stocks broke to new lows in 2009, the VIX never came close to the 2008 highs, a bullish non-confirmation. Since then, we have had several bearish non-confirmations warning of major corrections. Today we have another such bearish non-confirmation.
We can also show a shorter term by looking at the 10-day correlation between the S&P 500 Index and the VIX Index. If it rises in positive territory, which means that stocks and volatility generally move in the same direction, it can also serve as an effective short-term sell signal, although it does trigger early. Currently, this VIX warning signal is flashing again as earlier this year and for the corrections in the first and fourth quarters of 2018.
In short, the options market is sending a message that forward volatility is likely to be greater than the stock market now implies. And history shows that the options market is usually the one that wins this kind of argument.
Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage resulting from reliance on the information including data, quotes, charts and buy / sell signals contained within this website. Please be fully informed about the risks and costs associated with trading in the financial markets, it is one of the riskiest forms of investment possible.
