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VIX Falling....Volatility Falling....Understanding Stock Market Froth

Stock-Markets / Stock Markets 2016 Jul 19, 2016 - 12:01 PM GMT

By: Jack_Steiman


Let's understand what's happening with the VIX. For quite a long time, many, many months, the VIX kept finding closing support at 13.00 or higher. We would see some intraday spiked in to the 12's, but ultimately we would find a reading that closed above 13.00. This would mark the end of an uptrend for very short term. The VIX would then spike a few points, and sometimes more than just a few points, and, thus, we'd see the market fall back down. The bears could always count on a 13.00 close, or higher, as a time to get short. Now we're dealing with three consecutive days with the VIX closing below 13.00. A change of trend that occurred once we were able to, eventually, close above S&P 500 2134. With the VIX this low, the market does something else traders don't love. It grinds.

The daily moves get smaller and smaller. Those daily candle sticks get smaller and smaller, and folks get more and more emotional and frustrated in their trading. This leads to more unnecessary bad trades. Patience is not exactly the friend of most, if not all, traders. They want beta. They want movement. A VIX this low doesn't give much, and there's worse news possibly to come. If this breakout continues, the VIX will sink even lower and volatility will become almost non-existent. The single worst enemy of all traders is a market that wants nothing but small, tiny moves each and every day. Be prepared folks. Unless we get unexpected strong selling, the market will grind you to tears. If the VIX goes to single digits you could see the S&P 500 trade in a 5-6-point daily range. The VIX is telling the tale of less and less volatility. Prepare for it and you'll be fine. Don't expect those big moves we got used to seeing. Those days are gone for now. Only something big and unexpected will change the current landscape.

Now let's talk about the process of froth. Where the bull/bear spread has come from, and what's taking placing as it evolves towards more and more bulls. For a long time, as the market went lateral for a couple of years, we watched the bull/bear spread rock down from near 46 to near zero. The patience of the bulls got worn out as the market refused to break out and run higher with a new leg to the bull market. Eventually, things came back strong once we tested 1810 twice on the S&P 500, and the bull/bear spread started to slowly rise and gather momentum. Once we started to trend towards 2134, even though it took time to actually break out, the numbers started creeping up. Then came the breakout and now the froth is rocking in.

We had an unusual .40 reading on the bull/bear spread last week, which shows extreme complacency. We also saw the bull/bear spread rise to 28% from the mid-teens very quickly. My guess is that when we get the new reading this Wednesday for the action that closed from last Friday, we will see a number in the low to possibly even the mid-30's. The process of froth is ramping fast and on schedule. It doesn't take long once you break out to get those who were agnostic, or even bearish to come over to the bullish side of the ledger as traders fear missing out on upside action. The path to extreme froth is once again with us and rocking forward. A move towards 2250 or 2300, if we get there, should take us back to the mid 40's, or so, on the spread, and then it's get out of town on the long side. You don't always get nearly that high, but we did last time, so maybe we're destined for a double top on the bull/bear spread. It's already likely time to get cautious. Another 5-7% higher, and we'll be at extremes yet again.



Jack Steiman is author of ( ). Former columnist for, Jack is renowned for calling major shifts in the market, including the market bottom in mid-2002 and the market top in October 2007.

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© 2016

Mr. Steiman's commentaries and index analysis represent his own opinions and should not be relied upon for purposes of effecting securities transactions or other investing strategies, nor should they be construed as an offer or solicitation of an offer to sell or buy any security. You should not interpret Mr. Steiman's opinions as constituting investment advice. Trades mentioned on the site are hypothetical, not actual, positions.

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