Tuesday, September 23, 2014

What Is the VIX Fear Index Telling Us Now?

Supply and Demand

When you get down to brass tacks, asset prices are governed by supply and demand. In the markets, the conviction of buyers relative to the conviction of sellers also plays a major role. Therefore, “I am confident” vs. “I am nervous” ratios can help us monitor and manage investment risk. What is the market telling us now?

Confident vs. Nervous

One confident vs. nervous ratio, the S&P 500 relative to the VIX, is shown below. When the ratio was pushed back at resistance (see point A), weakness in stocks followed (bottom of chart). Conversely, when the ratio cleared resistance (point B), good things happened in the stock market. Last Friday (before the FED), the ratio was revisiting the horizontal blue line, meaning it was at a possible inflection point (see point C).
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