FOMC, rate hike or not? Let’s look at fact and VIX – the fear index

Definitely, the market had a bad sell down 3 weeks ago. Call it panic sell or whatever. There was a sell down, there was a week close that’s bearish. Since then, prices has started retracing. Let’s look at fact.

  1. S&P500 closed down (note, week close, not spike low) from high 209 points.
  2. From lowest point, retraced to a current high by 160 pips.

What am I trying to say? Technically, this is just a retracement. Bulls have not won yet. If near to FOMC meeting, we do not have a conclusive bullishness, such as S&P500 firmly above 2000, then at best this is a retracement for more selling.

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S&P500 Percentage of fall and rise

 

VIX – Fear Index

Let me recap what is VIX from Wikipedia

Although the VIX is often called the “fear index”, a high VIX is not necessarily bearish for stocks.[8] Instead, the VIX is a measure of market perceived volatility in either direction, including to the upside.

Hence high VIX readings mean investors see significant risk that the market will move sharply, whether downward or upward. The highest VIX readings occur when investors anticipate that huge moves in either direction are likely. Only when investors perceive neither significant downside risk nor significant upside potential will the VIX be low.

Alright, we’ve seen a spike in VIX, That’s fear.

But one of the most common uses of VIX too is to compare with it’s corresponding index and look for possible relationship. We’ve seen that when VIX is high, S&P500 is low.

The problem always lies in – what is high and what is low?

On 2010 May and 2011 Aug, there are 2 occasions that VIX is high. What is important, is that VIX stayed high for a period of time. Market built base and head up again.

However, this time, we’ve seen VIX spike. What is interesting is that there was a week close of VIX above the 2 years of high created. VIX stayed support above this resistance turned support. From the spike high and high of VIX in 2010 and 2011 (around 40-50), VIX has retreated to a support around 22.

If you compare again to recent 2 years low of around 12, then current level of VIX is high. If you look at the new range formed (considering it broke 2 years high), then VIX is supported and away from high of 40-50.

What I need you to think about is:

Is VIX now at low or high? 

Let me know your thoughts in comment section. And I give you my thoughts and analysis before FOMC. Don’t forget, see you in BP class tomorrow on 17 Sep.

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SPX and VIX

 

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  1. By Daniel Ku Guet Liang

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