Chart Of The Week: Where Is The Depression's Vol?

03/09/09 10:11AM EDT
You’d think, that with the coming of the alleged Apocalypse, that Volatility would be shooting to new highs. See the chart below – not so much…

In the final week of February, with the SP500 getting rocked (down -11% for the month!), the Volatility Index (VIX) was actually down -6% on the week. This past week, while the SP500 tanked another -7%, the VIX was up a modest +6%, finishing the week with a down day, closing -1.7% at 49.33. On a 2 week basis, in the thralls of raging rhetoric that the Great Depression cometh, what gives here?

Of course this isn’t the Great Depression – anyone who studies economic history gets that – but it is what we have now coined as The Great Recession… and with all recessions, not matter how Great, there are such things as early cycle leading indicators. Provided that Volatility continues to make lower highs on rallies, the VIX may very well turn out to be one of the more classic ones.

From an immediate term Trade perspective (3 weeks or less), the VIX is obviously in a bearish position for stocks. Interestingly however, from an intermediate Trend perspective (3 months or more), its breaking down. Dampening volatility in the face of decelerating volume on market down days is, on the margin, a bullish leading indicator for stocks – for an immediate term Trade, at least.

I have intermediate Trend line resistance for the VIX at 51.04. If we breakout above that line, it will undoubtedly be bearish for stocks – but for now, you can tell me what this chart will be signaling to you, particularly if the VIX breaks to lower intermediate term lows.

The immediate term bottoming process in the US stock market will be a process, not a point.

Keith R. McCullough
CEO & Chief Investment Officer
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