Monday, 12 March 2018

Stock Market: VIX = 16, A Line in the Sand

VIX = 16 seems to be an important line in the sand.

Since 9 Nov 2016 (Trump Election Day), market volatility remains low as VIX stays below 16.

On 2 Feb 2018, VIX closed  at 17.15 (above 16 the first time), and it also signals the start of daily swings of greater than 1.5% in SPY. I wrote a post FOMO Buy Followed by Overdue Sell-Off, (dated 3 Feb) that pointed out this fact.

And on last Friday, 9 March 2018, VIX opened and closed below 16, and SPY gapped up 1.73%.


correlation between Vix vs SPY and what happens when VIX > 16
Showing correlation between SPY and VIX > 16 zone
(Click chart to enlarge)

There were greater than 1.73% up days in this VIX > 16 zone (area between the 2 vertical lines in chart), but they occurred as oversold bounces, which are typically quite large, but this isn't the case on last Friday.

So,
        VIX  >16 = Fear Trade = Market Correction
        VIX < 16 = FOMO Trade

This is true at least for YTD 2018. Will have to wait and see if it's true for the rest of this year.



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