A Low VIX and Market Tops (by PikerTrader)

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On Friday the VIX aka the Volatility Index closed at its lowest level since 2007, closing at $15.32.  Support for the VIX has been around $16.90-$15.60, since 2008 before the market tanked.  The most recent line in the sand is at $15.60, which was broken on Friday.  With the VIX measuring fear and the volatility in the market, this extremely low number in theory represents a complete lack of fear and complacency in the market, meaing very bullish sentiment.


Just looking at this VIX chart, one can see when VIX hit these levels it quickly bounced the next few days. Moving up to the 21 day ema.  The longest time it spent at this level was in late 2010 early 2011.

 Here is a look at SPX with the VIX.  The last time VIX was near these levels, the market topped in May of 2010, right before Waddle & Redd killed the market with their order of sell 10 E-minis.  In addition it marked the December 2010-February 2011 short-term top.  But more importantly in early 2008 the VIX was near these levels, it was trading around the high $16's and this marked the 2008 top. 


Looking at VIX, when it has dropped below support at $15.60 here are the changes in the market over the next 1 day, 5 days, 30 days and 60 days:

Screen shot 2011-04-17 at 8.05.04 PM

The biggest decline came just a year ago, the VIX broke below the $15.60 level and the market tanked for the next 2 months.  But looking at the chart we can anticpate a market that does not move anywhere for the next 1-5 day. But after that it will chose a direction, the biggest moves have been moves down. This table does not include, the drop from 2008, since the VIX never broke the $15.60 level.

Now a caveat to VIX being this low is that if it continues lower, it is possible there could be another bull leg. Notice when VIX broke the $15.60 in 2003, the market climbed and climbed.


To sum up, we have a VIX at a very low level and in the most recent past this has marked market tops.  The most significant market top was the 2008 high.  But VIXs continues lower it is possible to see a new leg up. But the edge seems to be pointing towards a move down.

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