A few observations today on the weekly chart of the VIX:
- For the past 4.5 years, the VIX has been carving out a very tidy rounded bottom formation. Lower lows from 2012-2014 have been replaced by higher highs from 2014-present. This tells me the momentum has changed with regards to investors’ risk preference. Said differently, investors have moved from net bullish to net bearish. Remember, elevated VIX readings are associated with drops in the market.
- Every single time the VIX has touched the rounded bottom in the past 4.5 years it subsequently spiked higher while equity markets dropped (significantly so in certain instances). In some cases, the spike in the VIX happened immediately after it touched the rounded bottom and in some cases it took 6-8 weeks, but it always happened. Never has it touched the bottom and then fallen below that point. Why should this time be any different?
- The VIX today is the most oversold it’s been on a weekly basis since 2012. Experience tells me that the odds now favor a reversion to the zero line (ie. a rising VIX and a falling stock market
Perhaps the June FOMC meeting will be the catalyst?