The VIX Exists: It’s Bearish!

• Posted by Adam Warner
• on July 22nd, 2010

So on Friday, the VIX lifts under 5%, a rather tepid reaction to an ugly market day. Complacency! The general interpretation? Bearish for market.

On Tuesday, the market reverses an poor open to close green, VIX gets drilled, under 24 and equal to lows since the original May pop. More Complacency! Bearish.

On Wednesday, Market does nearly the reverse of Tuesday, strong open, ugly Ben reaction, VIX almost completely retraces, and basically moves up faster than SPY/SPX decline. Divergence! Excess Fear! And of course the general take is this is *smart money* and bearish.

So here’s my question. What can the VIX do that would form a consensus that it portends bullish for the market?

The chattering (and scribing) pundits view underperformance as bearish. That’s correct imho, with caveats. If, say, the VIX acts oddly weak on a summer Friday, it’s more statistical quirk than grand meaning.

They also view unexplained outperformance (VIX rallying too much) as bearish. That’s not correct imho, though you can point to early May VIX and *prove* me wrong on that one.

 

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