Best of the Week
Most Popular
1. US Housing Market House Prices Bull Market Trend Current State - Nadeem_Walayat
2.Gold and Silver End of Week Technical, CoT and Fundamental Status - Gary_Tanashian
3.Stock Market Dow Trend Forecast - April Update - Nadeem_Walayat
4.When Will the Stock Market’s Rally Stop? - Troy_Bombardia
5.Russia and China Intend to Drain the West of Its Gold - MoneyMetals
6.BAIDU (BIDU) - Top 10 Artificial Intelligence Stocks Investing To Profit from AI Mega-trend - Nadeem_Walayat
7.Stop Feeding the Chinese Empire - ‘Belt and Road’ Trojan Horse - Richard_Mills
8.Stock Market US China Trade War Panic! Trend Forecast May 2019 Update - Nadeem_Walayat
9.US China Trade Impasse Threatens US Lithium, Rare Earth Imports - Richard_Mills
10.How to Invest in AI Stocks to Profit from the Machine Intelligence Mega-trend - Nadeem_Walayat
Last 7 days
Brexit Party and Lib-Dems Pull Further Away from Labour and Tories in Latest Opinion Polls - 22nd May 19
The Deep State vs Donald Trump - US vs Them Part 2 - 21st May 19
Deep State & Financial Powers Worry about Alternative Currencies - 21st May 19
Gold’s Exciting Boredom - 21st May 19
Trade War Fears Again, Will Stocks Resume the Downtrend? - 21st May 19
Buffett Mistake Costs Him $4.3 Billion This Year—Here’s What Every Investor Can Learn from It - 21st May 19
Dow Stock Market Trend Forecast 2019 May Update - Video - 20th May 19
A Brief History of Financial Entropy - 20th May 19
Gold, MMT, Fiat Money Inflation In France - 20th May 19
WAR - Us versus Them Narrative - 20th May 19
US - Iran War Safe-haven Reasons to Own Gold - 20th May 19
How long does Google have to reference a website? - 20th May 19
Tory Leadership Contest - Will Michael Gove Stab Boris Johnson in the Back Again? - 19th May 19
Stock Market Counter-trend Rally - 19th May 19
Will Stock Market “Sell in May, Go Away” Lead to a Correction… or a Crash? - 19th May 19
US vs. Global Stocks Sector Rotation – What Next? Part 1 - 19th May 19
BrExit Party EarthQuake Could Win it 150 MP's at Next UK General Election! - 18th May 19
Dow Stock Market Trend Forecast 2019 May Update - 18th May 19
US Economy to Die a Traditional Death… Inflation Is Going to Move Higher - 18th May 19
Trump’s Trade War Is Good for These 3 Dividend Stocks - 18th May 19
GDX Gold Mining Stocks Fundamentals Update - 17th May 19
Stock Markets Rally Hard – Is The Volatility Move Over? - 17th May 19
The Use of Technical Analysis for Forex Traders - 17th May 19
Brexit Party Set to Storm EU Parliament Elections - Seats Forecast - 17th May 19
Is the Trade War a Catalyst for Gold? - 17th May 19
This Is a Recession Indicator No One Is Talking About—and It’s Flashing Red - 17th May 19
War! Good or Bad for Stocks? - 17th May 19
How Many Seats Will Brexit Party Win - EU Parliament Elections Forecast 2019 - 16th May 19
It’s Not Technology but the Fed That Is Taking Away Jobs - 16th May 19
Learn to Protect your Forex Trading Capital - 16th May 19
Gold Ratio Charts Offer The Keys to the Bull Market - 16th May 19
Is Someone Secretly Smashing the Stock Market at Night? - 16th May 19

Market Oracle FREE Newsletter

U.S. House Prices Analysis and Trend Forecast 2019 to 2021

S&P VIX Ratio Signals Looming Decline for the Stock Market

Stock-Markets / Stock Markets 2010 Mar 09, 2010 - 02:57 AM GMT

By: Ashraf_Laidi

Stock-Markets

Best Financial Markets Analysis ArticleExactly fifty two weeks after the S&P500 hit its 12-year lows at 666, the index rose 68%, driving down the VIX near January's 19-month lows. Much analysis has been done on equity indices and the VIX on the S&P index options. But the relationship between the two merits closer attention. Neither the S&P500, nor the Dow have yet retested their January highs.


But the technical dynamics of the SP500/VIX ratio can be used as a possible forward-looking signal for a looming decline in the S&P500 index. On Friday, March 5th (52nd Friday of the 666 low in the S&P500), the S&P500/VIX ratio hit a 5-week high at 65.38. This level suggests these key developments:

1. The chart below is the S&P/VIX ratio since July 2009, indicating a possible double top around 65. Note that the first top (first circle) consists of 3 spikes (Jan 11, 14 and 19), followed by a 38% decline in the ratio in 4 days, consistent with a 5% sell-off in the S&P500.

2. The chart below shows the 65.38 level in the SP500/VIX ratio coincides with the trend line resistance extending from the Aug 22, 2008 high through the January 19, 2010 high,

3. Finally, the weekly S&P/VIX chart below shows Fridays high of 65.38 also coinciding with the 200-week moving average; a high profile measure of long term trend. The last time the ratio neared its 200-week MA was in July 2007; 3 months before equities had hit their record highs.

NOTE: The yellow text inside the chart should say 200-WEEK not 200-day MA

Such ratio analysis may not be the most popular approach to discerning market dynamics, but their viability can be just as relevant as price charts or macroeconomic technicals. We have shown on this site how ratio analysis of related markets could offer valuable forward-looking signals; Gold/Oil ratio ; Equities/ Gold ratio and gold/silver ratio

Failure of the SP500/VIX ratio to sustain recent gains would coincide with a clear technical failure and add more conviction to the technically-oriented equity watchers. We have seen S&P500 testing the trend line resistance from the mid Jan highs, while seeing the VIX deepening losses below 17, but it is the topping formation in the S&P 500 / VIX ratio, which could make the case for fresh downside in equities.

Meanwhile in currencies, we reiterate our initial call from March 2nd about the two vital points emerging in Forex confirming the US strength:

1. The daily correlation between USD Index and the SP500 is NO LONGER negative (+0.10) for the first time since August 2008. This is partly explained by the win-win scenario for the USD, whereby rising USD continues to emerge during falling stocks, but is also starting to emerge despite the recent increase in equities.

2. USD-denominated 3-month LIBOR is now equal to its yen counterpart at 0.25% for the first time in 7 months. It was in August 2009 when USD-libor fell below JPY libor for the first time ever, rendering USD the cheapest funding currency in the industrialized world and making it the preferred vehicle for carry trades into higher yielding FX, equities and commodities.

The stabilization process in USD LIBOR began in late November as the Dubai debt revelations caused the first blow to global risk appetite, causing a drying up in liquidity and stabilization in USD-liquidity. The reversal of USD-negativity was extended into early December when an unexpectedly strong US November jobs report (released on December 4th) boosted fed funds futures to expect a rate hike as early as June. The triple downgrade assault of Greeces credit rating (Fitch on Dec 8, S&P on Dec 17 and Moodys on Dec 22) magnified the move out of EUR longs as well as other risk assets to the benefit of fresh longs in USD.

Although USD Libor (0.25%) stands below its EUR counterpart (0.59%), it fared more positively over the last 3 months as it remained near 0.25% since November. That is in contrast to EUR Libor, which fell 15% from its November highs of 0.68%.

The stabilization in USD Libor costs reflects the fading of the USD-carry trade and the greenbacks improved performance regardless of equity performance. In fact, the correlation between USD index and the SP500 has now hit positive territory +0.10 for the first time since August 2008. This is partly explained by the win-win scenario for the USD, whereby rising USD continues to emerge during falling stocks, but is also starting to emerge despite the recent increase in equities.This supports our ongoing call for $1.32 in $EURUSD by end of Q1.

Follow me on twitter http://twitter.com/alaidi for more frequent market updates

By Ashraf Laidi
AshrafLaidi.com

Ashraf Laidi is the Chief FX Analyst at CMC Markets NA. This publication is intended to be used for information purposes only and does not constitute investment advice. CMC Markets (US) LLC is registered as a Futures Commission Merchant with the Commodity Futures Trading Commission and is a member of the National Futures Association.

Ashraf Laidi Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules