Hey, A VIX Explosion

• Posted by Adam Warner
• on April 28th, 2010

I mean a serious explosion. I would preach until the cows come home not to rely much on VIX charting. But short term MA’s can prove useful, and there’s that rule that says you’re overbought (oversold) when the VIX gets 10% above (below) the 10 day SMA. And when the VIX is overbought(oversold), the SPX is oversold(overbought).

And lo and behold, check out that VIX. It went from hovering right near the 10 day to shooting to 32% over. In one day!

This is a very rare event. This from Ryan Detrick of Schaeffers.

$VIX up more than 25% today. 16 times since ’90. Avg. return a month later on SPX is minus 0.7% and up 63% of the time.

Before you back up the truck long though (or bail), remember this is just one indicator out there. And it’s best probably best used in reverse, i.e. seeing if the market actually rallies on over-Fear and using that as a gauge as to whether the intermediate trend remains in tact. The market did not rally when you had VIX explosions in 2008. But that was Fear consistent with the broader trend, this is Fear contrary to the broader trend.

We’ll see, but I find this set-up bullish. A huge uptick in Fear on a relatively tame selloff in the middle of a strong intermediate term rally.

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