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Volatility is getting absolutely crushed here in early 2010.

That’s a different setup than those we saw in both early 2008 and early 2009 (when the VIX moved higher). In the chart below, we put the latest down move in the volatility in context. Relative to the expectations of equity market bears, volatility has effectively vanished in the last 15 months.

Last week, the VIX dropped a whopping -16% week-over-week. To kick things off this week, the VIX took a peek at the 17 level, trading down another -3%, as the SP500 attempted making another higher-high.

How long can higher-highs in equities and lower-lows in volatility last? Well, on the volatility side of that answer, the immediate term price momentum is finally running out of downside. My immediate term (3 weeks or less) oversold line for the VIX is 17.21.

Any rally in volatility that is not able to eclipse the intermediate term TREND line (23.01, outlined by the red line in the chart), will keep the VIX in what we call a Bearish Formation. That’s when the long term TAIL sits above the intermediate term TREND; and the intermediate term TREND line sits above the immediate term TRADE line.

May of 2008 was the last time we saw VIX prices this low. Obviously it paid to buy volatility back then. The VIX is much more a concurrent indicator than a leading one. We would be long volatility here on weakness, but only for an immediate term TRADE to the upside – unless, of course, we were to see a closing VIX price above 23.01.

KM

Keith R. McCullough
Chief Executive Officer

Chart of The Week: Crushing Volatility - VIX11